Economics of Sport - Assignment Example

Economics of Sports 15 November, 2009 a) What is competitive balance and how is it measured? Give examples. Competitive balance refers to the shape of the probability distribution of the likelihood of the teams winning the tournament (Fizel & Fort, 2004). Competitive balance is needed for the purpose of uncertainty of outcome. Competitive balance is the evenness of sporting competition. It is one of the key operational objectives of the sports industry. There are three general types of competitive balance in the sports industry. 1. The closeness of individual match results. 2. The evenness of seasonal results. 3. The long-run evenness of a league or sports competition (Fizel &Fort, 2004). Competition is the very product of the sports industry. In order to survive sports leagues need to provide “competitive excitement”. Without this sports excitement, the league and the events would be dull and would not attract fans and customers. The uniqueness of the sports world lies in the fact that they develop their business on selling competition. Fans, media and policy makers are always concerned about decreasing competitive balance (Albert & Koning, 2007). One of the key features of the economics of sports is that the demand for its product is related to the uncertainty of the outcome (Garland, Malcom & Rowe, 2000). The league attempts to restrict competition so that no one team is able to gain too much market power or excessive dominance. If any team of professional team sports gains monopoly, it would cause the revenue to disappear altogether (Garland, Malcom & Rowe, 2000). There are numerous ways of measuring competitive balance. Some of those are discussed below (Albert & Koning, 2007). There are many ways to measure competitive balances, the most frequently used metrics are standard deviation and win percentages of the teams for a given year, ratio of the actual to idealized standardized standard deviation of win percentages, ratio of top to bottom win percentages, the range of win percentages, the gini coefficient of win percentages and the excess tail frequencies (Zimbalist, 2004). It is assumed that fans have a strong preference of uncertainty of outcomes for the purpose of hopes and expectations. The best measure to use would be one to which consumers show most sensitivity (Zimbalist, 2004). In his book “Handbook of sports economics” (2006) Fizel explains that there are many measures of competitive balance, but their efficacy is still argued over. However the arguments over the relative efficacy are due to the inability to understand the distinction between the three main elements of competitive balance. Measures of Game Uncertainty (GU) There are two types of Game Uncertainty variables. The first measures the dispersion of winning percentages and have the following variables: 1. Ratio of actual standard deviation of winning percent to the standard deviation in a hypothetically balanced league. 2. Likelihood that the winning percents of the top and bottom 20% of teams occurs in the “idealized” normal distribution. 3. Herfindahl-type concentration of winning percent of the teams at the top or bottom of the standings. 4. League-wide Gini coefficient of winning percents (Fizel , 2006). The second variable is the measure of game closeness which consists of the following variables: 1. Relative quality of the home team, by winning percents or league standing at the time of the game. 2. Probability that the home teams will win based on betting odds. Each measure has its own distinctive strengths and weaknesses (Fizel , 2006). Measures of Playoff Uncertainty (PU) Variables for Playoff Uncertainty include: 1. Games back as a measure of closeness of pennant race 2. Month of the observation, a measure of depth into the season and knowledge of playoff possibilities 3. End of season winning percent differences between top and bottom teams (Fizel , 2006). Measures of Consecutive Season Uncertainty (CSU) Variables used to measure Consecutive Season Uncertainty include: 1. Correlation between this year’s winning percent and last years winning percent 2. Sum of the cumulative variances and the time variance of winning percents of each team 3. Ration of standard deviation of winning percent averaged across teams to standard deviation of winning percent averaged across a specific number of seasons (Fizel , 2006). . b) What is the right level of competitive imbalance and what mechanisms can sports authorities/administrators put in place to reduce competitive imbalance?     remain at the top and those which are not remain at the bottom for long periods of time. Although it is widely agree that competitive balance is essential for keeping fans interested, it has also been viewed that in certain cases the home team’s performance has a significant impact on the attendance. This is in contrast to the hypotheses of uncertainty of outcome. This probability increases when there is a great chance that the home team will win the game. Fans will also be interested in a game or a season if they feel that it is highly likely that their favorite team will win. Although local fans want the home team to win, they still prefer and value competitiveness. Games with predictable outcomes tend to reduce fan interest (Zimbalist, 2006). Some degree of competitive imbalance is important because of some of the challenges faced in implementing competitive balance. The cost associated with maintain competitive balance have increased over a period of time ( Barr, Hums & Masteralixis, 2008). Szymanski and Leach in their study titled “Tilting the Playing Field: Why a sports league planner would choose less, not more, competitive balance: The case of English Football” (2006) state that attendances would fall if the league offered more balanced competition. Some teams should dominate season after season since only a single parameter occurs for all seasons. Attendance is maximized in each season by awarding wins according to the attendance sensitivity parameters. Factors contributing to competitive imbalance which can be used include signing in new talent. Another option is the split pool system which involves taxing each team 20 percent of the net local revenue from TV, cable, gate, radio, sponsorships, premium seating and other costs. This system was applied in 2001 (Zimbalist, 2004).Other methods could involve giving each time a chance to have equal chance to win and reducing the uncertainty of outcome (Andreff & Szymanski, 2006). 2. Giving examples, examine the following as determinants of attendance demand:   a) Market size Market size is a major determinant of attendance demand. A larger market size is associated with high levels of attendance, holding other factors constant. In a 1995 study conducted by Wilson and Sim, it was revealed that the home team’s market size had a massive and positive impact on the attendance at the Malaysian Semi-Pro League soccer. At the same time it was discovered that the away team’s market size had a smaller effect. Schmidt and Berri (2001) showed that the importance of market size is significant determinant of individual team attendance (Andreff & Szymanski, 2006). Attendance is determined mainly by the franchise market size paired with the club win-lose record. Since teams are located in cities of different sizes, the ability to field a team is affected by the franchise market size (Scully, 1995). b) Uncertainty of outcome Uncertainty of outcomes refers to the degree of individual contest and tournament predictability. It reflects the competitive balance of the teams. Maintaining uncertainty of outcome is a necessary requirement for financial viability of the sports league (Fizel & Fort, 2004). The uncertainty of outcome hypothesis states that the interest of the spectator is maximized when the sporting competition is at its most intense, for example when two equally strong opponents. This is due to the uncertainty of the match out come (Dawson & Downward, 2000). An example of this would be the Wigan Rugby League Football Club winning ten championships in a row; such a track record would imply that competition facing such a team is bound to lose. The demand attendance increases when is intense and the spectator interest is aroused as a result of the unpredictable outcome (Dawson & Downward, 2000). c) Broadcasting There is considered to be a link between attendance demand and broadcasting. Television broadcasting covers geographically distinct markets. Gate attendance is mostly made up of home fans while the away fans comprise of the TV audience. Therefore home team performance matters for gate audience but is not as relevant for the TV audience. The relation between gate attendance and TV broadcasting has been studied with the simple question of whether TV broadcasting lowers gate attendance for an event under the usual effects of attendance demand (Andreff & Szymanski, 2006). Studies usually offer mixed results. Earlier and recent studies conducted in the US have raveled that TV broadcasting of live events reduced agate attendance. It is believed that broadcasting and attendance are complementary goods. Studies conducted in UK by Kuypers (1996) revealed that there are not significant linkages between broadcasting and attendance (Dawson & Downward, 2000). . References Albert J & Koning R (2007) Statistical thinking in sports. CRC Press Andreff W & Szymanski S (2006) Handbook on the economics of sport. Edward Elgar Publishing Barr C, Hums M & Masteralixis LP (2008) Principles and Practice of Sport Management. Jones & Bartlett Publishers Dawson A & Downward P (2000) The economics of professional team sports. Routledge. Fizel J (2006) Handbook of sports economics research. M.E. Sharpe Fizel J &Fort RD (2004) International sports economics comparisons. Greenwood Publishing Group. Garland J, Malcom D & Rowe M (2000) The future of football: challenges for the twenty-first century. Routledge Scully GW, (1995) The market structure of sports. University of Chicago Press, Szymanski S & Leach S (2006) Tilting the Playing Field: Why a sports league planner would choose less, not more, competitive balance: The case of English Football. International Associations Sports. Zimbalist AS (2004) May the best team win: baseball economics and public policy. Brookings Institution Press Zimbalist AS (2006) The bottom line: observations and arguments on the sports business. Temple University Press Bibliography Fort, R and Maxcy, J (2003) Comment:“Competitive balance in sports leagues: an introduction” Journal of Sports Economics vol 4, no 2, May Brandes, L and Franck, E (2007) Who Made Who? An Empirical Analysis of Competitive Balance in European Soccer Leagues, Eastern Economic Journal, vol 33, no.3 Berri, D et al (2006) The Wages of Wins, chaps 4 and 5 Read More