How Supply and Demand are Affected by Rising Ticket Price, Wage Cost and Competitive Balances - Essay Example

BASEBALL ECONOMICS How Supply and Demand are affected by Rising Ticket Price, Wage Cost and Competitive Balances SCHOOLBaseball Economics The principles of economics are often perceived as items reserved for textbooks. On the contrary, economic concepts may be applied expansively. It may be related not only to the usual businesses discussed over the newspapers or some television show but also to various subjects one may think of. For instance, economics may be seen in action in the field of sports like baseball, which after all is a big business. This paper discusses how the basic economic principles operate within the framework of professional baseball. It tackles how prevailing conditions, such as rising ticket prices, skyrocketing salaries of players and competitive balances among teams, have an impact on the supply and demand concepts. Slowing Demand of Baseball Fanatics Over the years, various studies show that participation in professional baseball games have steadily declined. There are many reasons attributed to this condition of reduction in demand for baseball as indicated by the lower ticket sales based on volume. One reason cited is that the ticket prices have risen sharply in the past 15 years. This is accompanied by increases in the price of related goods or complementary goods to baseball games live, including parking fees and food prices. (Wood, 2004) To illustrate this point, Chicago-based research company Team Marketing Research asserted that on the average, a family of four is estimated to spend about $153 for watching in big-league ballparks as at 2004. This figure represents nearly 3% increase from 2003. Similarly, Philadelphia Phillies fans are estimated to spend around $188 for a family of four. This is greater than a 25% jump from the cost in the previous year. (Wood, 2004) Apart from this, another reason mentioned is the change in the kind of spectators who are purchasing baseball tickets. It is seen that corporations and other businesses are buying in bulks to impress clients by giving away complimentary tickets. Note that these business entities would opt for the premium seats such as those located in blocks behind the home plate and in covered boxes. In this regard, baseball owners are able to jack up the price for seats in these locations as there is an assured demand for such. Moreover, as these owners attempt to recoup the increasing cost of doing business, they boost the ticket prices particularly for those in prime locations (Wood, 2004). For instance, team owners have to contend with the meteoric rise in their factors of production, especially labor. Wage is often perceived as the primary component of business cost that leads to the increase in price (Dornbusch, Fisher& Starkz, 2002). In professional baseball, it is seen that teams belonging to the top 25% of revenue-earners have experienced an increase of $28 million on the average between 1995 and 1999 alone (Bergen, 2000). As team owners are tied up with multi-year and multi-million dollar contracts with their players, they attempt to recover the substantial wage cost by increasing ticket prices. Given the above, it could be concluded that inflation has not only affected the basic goods but the baseball ticket prices as well. This could be better explained with the aid of the graph (Change in Demand for Baseball Game Tickets). Based on the graph, it is exhibited that the price of baseball tickets has increased form D0 to D1 due to the consistent demand of corporate buyers coupled with the increasing cost of operating a baseball team. In macroeconomic terms, the "inflation" that has affected baseball tickets may be classified as both cost-push and demand-pull. These means that the steady demand for baseball tickets as well as the rise in the cost of doing business (Samuelson & Nordhaus, 2002) has led to the hiking up of baseball ticket prices. However, as baseball fans, especially families, have been hit by inflation, thus increasing the prices of basic commodities, they have less disposable income for leisure such as watching live baseball games. As the price of baseball tickets also rises, purchasing tickets may no longer be within their budget range. With this, they have to forego this expense item. As such, the demand for baseball tickets decline with the shift from D1 to D2. Baseball team owners are quick to recognize this economic phenomenon by acting upon the issue instantly. To dynamically adjust to the needs of their intended market, some concerned baseball owners, heeding the advice of their marketing gurus, have decided to lower some ticket blocks. In doing so, various pricing schemes, such as variable pricing, opponent pricing, day-of-the-week pricing and partial plans, have been considered so as not to alienate die-hard fans from the national pastime. Some are also offering substantial discounts and deals in order to fill up seats while maintaining a premium for prime seats. (Boeck, 2004) Rather than augmenting their revenues by increasing ticket prices, owners opt to earn from other related consumption expenditure including the buying of colas, hotdogs, t-shirts, programs. They are creating more family packages inclusive of food, beverage and tickets as well as offering more nights for children by dropping general admission prices to $3. For example, some teams are offering affordable package that includes a bundle of goods including baseball tickets for upper deck seats, four Cokes and four hotdogs. (Wood, 2004) Aside from these, they also try to defray the cost by making deals with broadcasters and advertisers through the forging of more agreements with television outlets and revamping of advertising video boards in their respective stadium. (Wood, 2004) By reducing ticket prices, the probability of fans making a repeat purchase is increased (Boeck, 2004). Thus, team owners are expecting demand to stabilize once again. This may result in the rightward shift of the D2 curve indicating the pick up in demand. Weakening Competition in the Baseball Business There have been many speculations that the sport of baseball may be threatened by the high revenue teams such as the New York Yankees, Los Angeles Dodgers, Boston Red Sox or Arizona Diamondbacks. This is because the level of competition in the industry is diminished by the fact that low revenue teams are unable to afford the high cost of labor to guarantee success of baseball teams. ("Baseball Economics 101", n.d.) Although the concept of competition leans toward microeconomics rather macroeconomics, it is still important to note that competitive conditions are important to analyze in determining what is optimal for a given industry. In the case of the baseball industry, competition is largely affected by the growing revenue disparities among teams (Bergen, 2000). With this, the fact becomes glaring that high revenue teams comprise of those with high payroll expenses as they are able to draft baseball superstars that guarantee numerous wins. Once they achieved success in the diamond, the interplay of supply and demand becomes evident. As teams post championship records, they become crowd favorites, thus more fans demand tickets or items of their favorite teams. Given this, teams gain greater power as a supplier and are able to bid up prices of their supplies. Again, we go back to the economic conditions discussed in the previous section. On the other hand, small market teams tend to keep their salaries at a minimum as they sense no hope of being competitive (Bergen, 2000). At the same time, they have less followings as majority of baseball fans root for winning fans rather than those with losing streak. Given the specialized needs of baseball teams, the wage factor becomes significant to determine the success and market power of baseball teams. However, any type of sports business thrives in competition. As such, baseball requires the presence of formidable competitors to continue to exist. In this regard, the Blue Ribbon Panel organized by the Commissioner of Major League Baseball has recommended various ways to foster competition in the league. (Bergen, 2000) So as not to disadvantage low revenue teams, the Panel has pushed for the increased in revenue sharing for local revenues and imposing of a competitive balance tax on payrolls above a certain level. Furthermore, the Panel has recommended that the league set up a central fund for distribution to low-revenue clubs and somehow equalize revenues. However, some economists question the resulting efficiency from these courses of action. (Bergen, 2000) International Trade In a way, the concept of international trade applies to professional baseball. Baseball teams are normally seen to import the best baseball players in other countries to gain competitive advantage. For instance, David Ortiz and Manny Ramirez from the Dominican Republic were contracted by their respective baseball teams to play for them. This may be due to the fact that it would be more advantageous or efficient for a team to import highly-skilled laborers rather than focus on training potential players within the country. Conclusion In view of the above, it could be seen that the rise in ticket prices may be attributed to the substantial increase in the cost of doing business, specifically the exponential growth of payroll expenses of baseball teams as they compete in having the best baseball players all over the world. Furthermore, the consistent demand from corporate clients preferring the best seats in the stadium contribute to the increase in the ticket prices as they render team owners with greater supplier power. However, as the price of tickets and complementary goods continues to rise, demand from the price-sensitive fans especially families continue to decline. With this, various affordable packages are being offered to increase demand. To recoup their cost, baseball team owners look for alternative ways to augment their revenue instead of depending heavily on ticket sales. It is also discussed that competitive balance in the league has been diminished by the increasing disparity in income of baseball teams. This, in a way, also threatens demand since the concept of competition among clubs fuels the baseball business. Works Cited Baseball Economics 101. (n.d.). Accessed: 20 September 2006 from: http://www.econedlink.org/lessons/index.cfmlesson=EM75 Bergen, B.M. (2000). Economics of Baseball. Accessed: 20 September 2006 from: http://www.rh.edu/stodder/BE/baseball.htm Boeck, G. (2004). "Teams woo fans with cheaper seats." USA Today. Accessed: 20 September 2006 from: http://www.usatoday.com/sports/2004-08-30-top-ten-number-8_x.htm Dornbusch, P., S. Fisher and P. Starkz. (2002). Macroeconomics. McGraw-Hill Inc. Samuelson, P. and W. Nordhaus. (2002). Economics. McGraw-Hill Inc. Wood, D.B. (2004). "The baseball stat you don't want to see." Christian Science Monitor. Accessed: 20 September 2006 from: http://www.csmonitor.com/2004/0415/p03s01-ussc.html Read More