Professional Team Sports as the Product Offered to the Fans - Term Paper Example

Professional Team Sports In economic terms, one can liken Professional team sports with industries or enterprises, with their owners being the entrepreneurs and the game being the product that they offer to their consumers, the fans. The players form the main input in to the production process by the respective coaches who take the role of the managers in an industrial set up. Unlike the business world, one club alone cannot sell the product, but an opposing team is required to accomplish this goal. Making profits is a key aspect in any business venture (Wladimir and Stefan, 2006:617). This understanding has created interest in finding out the real effect of decisions made by club owners and franchise on the structure and regulation of leagues around the world. This paper therefore seeks to interrogate the different ways in which the objectives and decisions of club owners in professional sports affect the overall sporting arena. In order to get better sales in sports, high level of competition is required unlike in business where monopoly is the ultimate goal. If there are championships or leagues, the participation of more than two clubs will be necessary to ensure better products to the fans. If one club is far better than the rest and keeps on winning all games with ease, the products become so predictable and therefore less marketable to the fans (Wladimir & Stefan, 2006:27). Fans will get bored in watching a team that wins with big margins repeatedly and so need some degree of uncertainty for them to enjoy watching the game. This phenomenon of the professional sports as an industry has led to the development of cooperation among clubs and the adoption of governing bodies charged with ensuring that the industry attains its optimal production capacity by way of organising championships and leagues. These leagues are highly competitive and as such have become some of the most profitable enterprises around the globe. For instance, the European champions’ league, the Barclays premier league in England and the La-liga of Spain are some examples among many leagues in football that are leading income earners for the respective clubs and contribute a considerable amount of the countries’ GDP. Baseball, basketball, indoor sports, golf, athletics, and Olympics in general all form a multibillion-dollar economy (Masteralexis and Hums, 2002:295). The graph below shows how revenue from sporting activities has increased over the years. Figure 1: graphic illustration of increase in revenue in the sports sector associated with increasing commercialization Retrieved from http://www.econweb.com/MacroWelcome/sandd/D-Shift_New_Equilibrium.gif According to some economists, this feature of professional sport is quite favourable as it eradicates monopolies, which are responsible for poor quality of products or services offered and high non-commensurate prices. In the end, the whole arena of professional sports forms a model of free market where competitiveness of the product offered carries the largest share. This competition however is not always healthy especially with respect to the labour market (Stefan, 2007:47). Here, the free relocation and transfer of players from one club to the other based on the wages has made the wealthier clubs maintain a grip of the top leagues and championships over the less wealthy clubs. Therefore, wealthy club owners can get all the best talent there is in the market and thereby in a way kill competition, which is the very phenomenon on which the industry thrives (Rodney, 2004:25). This has resulted to creation of oligopolistic cartels where the higher level of game is exclusive to the rich clubs where as the less wealthy clubs play in the lower divisions that are less competitive and less famous among the fans ((Wladimir and Stefan, 2006:64). This means that fans will be flocking the gates only when big teams are playing. This obviously means very high revenues for them where as the poorer clubs will only have small number of fans in attendance and will in most cases charge less fee for their matches. Although the leagues as the governing entities have some restriction on the transfer of players from one club to the other, they can only achieve little since the clubs are free to determine the prices for prayers, as well as their buying and disposing regimes. The club owners are interested in winning while entertaining fans in all their championships, the only sure way to ensure maximum profitability thanks to ticket is pricing (Dobson and Goddard 206). The illustration of MLB financial data below shows how wealthy teams have resulted in higher spending on talent over the years. Figure 2: Illustration of increased spending by teams of talent and labour over the last four decades Retrieved from http://static7.businessinsider.com/image/4d38ef524bd7c8392d4d0000/mlb-salaries-since-1970.jpg Club owners and franchises have varied objectives, which result to different outcomes in respect to the distribution of talent among the different clubs, pricing of tickets, profitability, fan base, and prayer salaries among other variables. Although clubs are always running after talent in players, the overall objective revolves around maximising profits. Sensational players will mean a more entertaining game and many winnings, which all translate to profits from increased spectators attending matches and the income from winning championships (Rodney, 2004:88). Clubs invest on basis of increasing the total earnings to levels higher than the costs. If y represents the profits in a given season, then the objective is: Max y = max (R-C) Where R is the season’s total revenue and C is the total cost for the season. A club increases its marginal profitability if the revenue generated by acquisition of one talent is equal to the cost associated with acquiring of the talent as indicated below. Figure 3: effect of marginal costs on profits Retrieved http://spot.colorado.edu/~kaplan/econ2010/tests/exam2_files/image002.jpg This means that as long as the marginal revenue is higher than the marginal cost, then the club can increase its profit margins by hiring of more talent. Hiring the best talent that is available in the market is the surest way of attaining their goal, simply put, the goal is to maximise on the playing talent under the given restrictions. Budgetary allocation is the most prevalent restriction across all clubs with a breakeven being determined by equating all total revenue to total expenditures. Clubs have to guarantee a certain rate of profitability in order to meet the expectations of the shareholders and or owners although they can achieve this objective without necessarily aiming for profit maximization. This win-maximization model also factors in seasonal losses since as a consumer the owner of the club may decide to spend more money on the team in preparation for future stability (Rodney, 2004:119). In simple mathematics, this objective function is: Max w subject to: R-C = y0 Where w is the seasonal winning percentage of the team and y0 is a fixed profit for the season whether positive or negative. If the club considers capital stock as a constant for the short term, a fixed amount of profit also implies a fixed profit rate. The breakeven condition is therefore only a special case where profits are zero. Win maximization under the breakeven condition is also equivalent to constrained revenue maximization as long as no reduction of total club revenue at very high club winning percentage (Alistair & Paul, 2002:27). Maximising a linear combination of profits and wins is an indication that clubs are increasing employing a utility maximization model, as written below: Max (y +aw) with a>0 Since the weight parameter a can be different for every club, it allows clubs to be either more profit or win oriented. This model is more comparable with the win-maximisation model, which also allows the possibility of profit maximization at a certain rate. Empirical tests fail to be conclusive in accepting or rejecting the profit or win maximization hypothesis Economists are increasingly viewing Professional sport clubs as either cartels or monopolies (Wladimir and Stefan, 2006:114). In business terms monopoly refers to a single firm being the sole supplier of a certain good, where as cartel refers to a group of firms in a particular market who come together to act as a single supplier to a given market (Delaney and Madigan, 229). The graph below best illustrates this phenomenon: Figure 4: illustration of oligopolistic cartels in profit maximization Retrieved from http://media.wiley.com/Lux/01/9701.nfg001.jpg However, the clubs do not view themselves in this light since the leagues comprise of several teams competing with each other on the sporting fields. For an economist, the fact that they themselves set the rules for a particular league in business terms they qualify the definition of a cartel. For example, for teams to continue buying and selling players or paying bonuses for good performance they will need to make some financial decisions. The league governing bodies, for this effect, have made such decisions as assigning certain minimum of home games so that the teams can earn gate collections to a certain tune to enable them cater for labour and other related costs. Further, the clubs themselves have to coordinate matches to some extent; undertake to inform fans when, and where matches are to occur (Stefan, 2007:9). This means that they will require accommodation and observation benches, which are restricted to only those who pay through construction of enclosed stadia with secured entry points. Focusing on the behaviour of individual clubs in the market, draws attention to the process by which the markets may be expected to evolve, a situation that gives the description of sporting clubs as cartels some impetus. Apparent monopolistic characteristics by sporting leagues in the allocation of resources are not necessarily benign (Wladimir and Stefan, 2006:253). Contrary, subject to the need to co-operate to produce fixtures, viewing the team as a firm allows for explicit analysis of teams independence. This implies that absence of co-operation would mean independence due to the small number of clubs in a league and the different products that they offer. Every club supplies a significant proportion to the total league output and no team can ignore the possibility that every team will seek to react to any changes to the quantity of its wins. Given that a cartel is as strong as its membership, the leagues always put forth measures to address any conflicting interests within their membership. In practise, leagues have adopted changing attitudes to cross-subsidization as the balance of power has changed between the wealthy and the poorer clubs. For instance, in England leading football clubs, which provided the bulk of televised matches, naturally wanted a larger share of the earnings, initially equally shared among league members. This situation caused commotion within the league of them time with the bigger teams threatening to breakaway and for their own league, a threat that resulted to the present day premier league. Similar situations occurred in rugby and baseball leagues across the globe, effectively changing the structure of the leagues to the form they exist in today (Masteralexis and Hums, 2002:296). From this discussion, it is clear the manner in which club owners and franchises influence the structure of the leagues based on the need for more profits as the primary driving force. In this respect, owners of clubs although competing in the fields, often come together as a united body to fight a common course and often end up influencing the resultant direction and structure of the leagues. In conclusion, the objectives of club owners and franchises in professional sports have a great impact on the structure and regulation of leagues. Given that, the key objective of these owners and franchises is to make a profit, their control of the leagues is usually important to the extent that they have to be involved in key decision-making process within the league. Competition patterns that favour the well endowed have since time immemorial dominated leagues world over across all sporting arenas (Stefan, 2007:2). Breakdown of leagues in favour of formation of new ones is a common phenomenon in all leagues. Club owners, who feel disadvantaged by certain trends or terms of engagement in the leagues, normally institute this and result into collusion to make things work in their favour. In determining the venues for various matches, lobbying is the usual trend via which leagues reach decisions. Every club owner would like to attain and maintain dominance both in wining and in making profits there by more than often engaging in otherwise unhealthy competition, which favours the rich clubs. In the end, the leagues remain unchanged as long as the owners of clubs in a given league remain united in a common course. For instance, rich clubs can afford to attain, dominate higher divisions in any league and nature talents at high costs, a practise that ensures lower division leagues have limited chances of climbing to the higher ranging leagues. According to Stefan (2007:94), in the event that a wealthy club is experiencing a decline in performance, club owner usually take drastic measures to salvage the team, including hiring new talent, managers, and improving facilities even if they have to do that from their pocket. Therefore, the assertion that the objectives of club owners and franchise indeed have serious implications on the structure and regulation of leagues is entirely true based on the findings revealed in this paper. Work cited Alistair D. & Paul D. 2002. The Economics of Professional Team Sports, London: Routledge. Delaney, Tim and Madigan Tim. The sociology of sports: an introduction. California: McFarland, 2009. Print. Dobson, Stephen and Goddard John. The Economics of Football. Cambridge: Cambridge University Press, 2011. Print. Kenneth L. S. & Scott, R. 2010. The Business of Sports. New York: Jones & Bartlett Publishers. Masteralexis and Hums Mary. Principles and Practice of Sport Management. New York: Jones & Bartlett Publishers, 2011. Print. Rodney, D. F. 2004. International sports economics comparisons, New York: Greenwood Publishing Group. Stefan, K. 2007. The economic theory of professional team sports: an analytical treatment, Cheltenham: Edward Elgar Publishing. Wladimir, A. and Stefan, S. 2006. Handbook on the economics of sport. Cheltenham: Edward Elgar Publishing. Read More