Exam #1 Study Guide Essay

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EXAM #1 REVIEW

Review of Selected Economic Factors * Opportunity Cost * Absolute and Comparative Advantage * Demand and Supply * Price elasticity of Demand * Relationship between price, price elasticity and demand, and total revenue * Concept of Production Function * Marginal Revenue Product = marginal factor cost – rule for determining how much resource input to employ

Factors Influencing Behavior of Sports Franchises * Goals/objectives (maximize profits or winning percentage) * Fans prefer wins to profits, however the owners may prefer profits over wins. * Different teams may have different goals … for example the Kansas City Royals seem to maximize profits over winning percentage whereas the Phillies tend to maximize wins over profits. * Profits are maximized where MR=MC * Wins are maximized where P=MC=AC. * Win maximizers tend to win more than profit maximizers. * Win maximizers tend to make lower profits than profit maximizers. * Sources of revenue * Five principal sources: * Ticket sales or gate receipts * Gate revenue comes from ticket sales * Local and national broadcasting rights * NFL: on five different networks; each team receives $117 million a year from TV; no big market-small market disparity. * MLB: the Yankees make about four times as much locally as nationally; teams often own the cable network; owners sell broadcast rights to themselves cheaply – this is a way to get around local revenue sharing * NBA: get much of their revenue from national broadcast contract; local revenue has become more important for NBA teams; has led to large disparities in income because it is not shared: LA Lakers got $150 million per year, but Charlotte Bobcats only got $9 million. * NHL: does not share local TV revenue; this is serious because league-wide TV revenue is low; small markets are at a severe disadvantage. * Licensing income * MLB ($2.75 billion) and NFL ($2.7 billion) are far ahead of the NBA ($1.75 billion) and NHL ($630 million). * Generally shared equally * Jerry Jones and Dallas Cowboys challenged sharing and have their own marketing arm. * Digital revenues are increasing in importance from online media to video games. * Other venue-related revenues, including luxury boxes, concessions, and stadium naming rights * Revenue from stadium – parking, concessions, luxury boxes and other special seating, naming rights, signage. * Cowboys own and sell more luxury boxes than any other team * Have 300; rent for $10s or $100s of thousands per season. * Teams do NOT share box revenue * Naming rights – team sells the right to name its facility; practice originated in 1973; have extended beyond pro stadiums * Economic studies show no impact on the sponsor’s profitability * Transfers from other teams in the league * How revenue is shared * Gate revenue sharing * NFL: home team keeps 60%; 40% is shared * NHL: complex gate sharing rules * NBA: currently share nothing, but will change under the new agreement. * MLB: now shares 31% * Some call revenue sharing a “tax on quality” * Importance of leagues and difference in leagues (MLB, NFL, NBA, and NHL) * Leagues are ubiquitous in pro sports * Provide teams with financial stability * National League was formed in 1876, seven years after the first pro baseball team formed (Cincinnati Reds) * NFL was formed in 1920, 44 years after William Heffelfinger became the first pro football player in 1876. * A league is a voluntary association that promotes the common interests of its members * The most important function of a league is to set the rules…