As outlined in section 2.2 earlier, in a perfectly competitive model all firms in an industry are assumed to be profit maximisers that sell an identical product to fully informed utility (satisfaction) maximising consumers. The corresponding sporting industry would be the league (market) of profit maximising clubs (firms) that all supply equally competitive fixtures (product) to fans (consumers) that seek to
The perfectly competitive model, in this context would assume that fans and clubs are small relative to the total number of clubs and fans, meaning their individual decisions to buy and sell tickets to watch fixtures cannot affect industry level activity as a whole. Furthermore, it would be assumed that there are no restrictions to entry or exit from the industry, implying unprofitable clubs are free to leave the league, while other clubs are free to enter the league and compete for profits. Clubs would also be able to decide their own quantity of output and could therefore produce more or less fixtures to the league as required. In addition, it would be assumed that all sporting fixtures are identical and there are no differences in quality between fixtures or the identity of fans to particular teams. A fan will therefore only choose one particular fixture over another because of differences in ticket price, however clubs are ‘price takers’ and have to accept prices determined by the market as a whole as they are unable to set their own. These are unrealistic assumptions, which is why it has been argued in the past that sports leagues are examples of monopolies (Neale 1964).
The fundamental difference between the monopoly model and the perfectly competitive model is that in a monopoly, only one firm supplies the market. As professional sports are often provided by one league (the sole supplier), a league can be viewed as a monopoly. In complete contrast to the perfectly competitive model, where clubs are unable to influence ticket price on the market, a monopoly league can alter ticket prices and therefore can adjust the volume of ticket sales for each of its fixtures. As the sole supplier of the product, the monopoly league faces the total market demand curve and is therefore a ‘price maker’.
If ticket prices are lowered in order to increase ticket sales then the MR earned by the sale of these additional tickets will be lower than the AR earned on previous ticket sales. Consequently, MR is less than AR for a monopoly or any form of market that is not perfectly competitive and where firms can control market price. Because monopoly firms face the market demand curve they are able to set prices according to what consumers are prepared to pay to see fixtures.
A key implication of monopoly supply is that because of the lack of competition and inability of clubs to enter the league or rival leagues to be formed to supply the sport, supernormal profits can always be earned even in the long run. This is because on each ticket sold there is a mark up above average cost (P>AC). These profit margins
monopolists are able to earn ultimately results in lost consumer surplus and lost producer surplus, meaning there is economic inefficiency in the monopoly case relative to the perfectly competitive case.
According to Neale (1964) the industry of team sports shows several characteristics of a natural monopoly. Furthermore, Neale (1964) claimed that sports would gravitate towards monopolies providing there is feasible economic or sporting basis for competition in the sport (Downward and Dawson 2000). Neale (1964) illustrates the history of sporting leagues is broadly consistent with the predictions of the natural monopoly thesis. Fort and Quirk (1995) reveal that by the end of 1994, monopoly leagues characterised all four major US team sports (American football, baseball, basketball and ice hockey). Neale (1964) argues monopoly profits will always attract competing leagues however, these will usually be short lived since existing leagues will resist entry by increasing labour costs and or reducing ticket revenue and income from broadcasting rights (Downward and Dawson 2000).
Historically, rival leagues have either merged as has happened in team sports such as, American football and English football, when the Football League absorbed the remains of the Southern League in 1920 after initially acquiring its most successful clubs. Alternatively, rival leagues can co-exist as separate entities whose members do not compete on the field but come together to produce world champions. In baseball, two rival leagues, the American League and the National League co-operate in order to produce the annual and highly lucrative World Series (Downward and Dawson 2000).
Although Neale’s (1964) predictions seem to be consistent with many outcomes of the development of sporting leagues, his argument fails to outline the rationale for, and description of mechanisms by which leagues have developed and operated (Downward and Dawson 2000). Neale’s (1964) argument essentially implied overall co-operation in matters of league management, however in sports, this is not always the case. The evolution of leagues can be down to the pursuit of particular interests rather than a perceived common good (Downward and Dawson 2000).
Sloane (1971) argued that a sporting league and its constituent clubs could be more accurately viewed as a cartel rather than a multi-plant firm. Sloane (1971) argued
behaves as a firm rather than a plant, although it is still unable to offer a saleable product without the league and is still subject to uncertainty of outcome. Consistent with Sloane’s argument is the fact most teams are independent entities that have control and make their own decisions on matters such as investment, the level of production, ticket prices and merchandising (Downward and Dawson 2000; Dobson and Goddard 2011). Sloane (1971) argued that Neale’s argument overemphasised the mutual interdependence of two competitors in the production of a sporting contest and labelled the club as the relevant economic decision maker.
Whilst cooperation of clubs within a cartel is necessary, clubs can still attempt to pursue a private advantage by breaking ranks with a membership as a whole (Downward et al 2009). A recent example of this is the formation of the Premier League in the UK, where the largest clubs broke away from the English Football League as a means to acquire a larger share of media and broadcasting revenue. According to Downward et al (2009) the cartel theory explains sports leagues better than the monopoly model as teams within the league have to cooperate in order to generate and distribute revenues, but frequently have differing interests.
The objectives of the professional team sports firm are widely debated. Differing objectives can lead to differing outcomes in terms of the distribution of talent amongst clubs in the league, total league revenue, player salaries and ticket prices (Kesenne 2007). The most common firm objective in economic theory is profit maximisation and analysts of professional sports in the United States often assume profit maximisation is also the main aim of professional sports clubs (Rottenberg 1956; Neale 1964; El Hodiri and Quirk 1971; Quirk and Fort 1992 and Vrooman 1995). Although professional sports clubs in North American sporting leagues are more business-like than their European counterparts some US economists have argued profit maximisation is an inappropriate assumption as team owners may privately pursue other objectives (Quirk and Fort 1992; Zimbalist 2003).
Sports economists in Europe have also raised doubts about profit maximisation being a realistic objective in professional sports (Kesenne 2007). Sloane (1971) rejected the profit maximisation objective in favour of utility maximisation, which he argued was more applicable to football. Sloane (1971) observed that many owners of European football clubs considered ownership of a club as an act of consumption rather than
investment. The implication of this assumption for professional team sports owners was that they consumed their resources in order to give them satisfaction rather than profit (Downward and Dawson 2000). As consumers, Sloane (1971) argued that many owners of European football clubs acted as if they were maximising a utility function where other variables such as playing success, stadium attendances, competitive balance and community building appeared as arguments (Kesenne 2007). As argued by Dobson and Goddard (2011), most chairmen and directors of football clubs have achieved success in business in other fields. Their motives for investing in clubs may therefore include a desire for power, prestige or simply because of their sporting enthusiasm. It is therefore sensible to view the objective of a football club as one of utility maximisations subject to a financial solvency constraint (Dobson and Goddard 2011).
Sloane’s (1971) proposed team utility function is given in equation 2.5c below.
U = U (P, A, X, πR - π0 – T) subject to πR≥ π0 + T (2.5C)
Where U = utility attained; P = playing success; average attendance; X = league health (uncertainty and competitive balance); πR = recorded profit; π0 = minimum
acceptable after tax profit and T = taxes. The utility maximising model has implications that differ to those that follow from the profit maximising assumptions of Rottenberg (1956) and Neale (1964). More specifically, the weighting of P is heavy relative to X and πR (Dobson and Goddard 2011). As also outlined by Kesenne (2007),
the crucial variable in Sloane’s (1971) utility function is P as sports clubs are above all, interested in winning. In order to make Sloane’s (1971) utility maximising model more operational Kesenne (1996) introduced win maximisation as the sole objective. Kesenne (1996) argued that the behaviour of club owners and managers across Europe suggested that their main objective was to maximise their winning percentages, subject to a breakeven constraint ensuring no losses were made. According to Kesenne (1996) club owners will estimate their expected total season revenue and then pursue the best players they can afford within this budget, such as:
Max W
Where, W is the win percentage of a team, C is the total season cost and R is the total season revenue. The revenue function was assumed to be concave in the winning percentage. Rascher (1997) proposed yet another variation of Sloane’s (1971) utility maximisation model and assumed sports clubs maximised a linear combination of profits and wins.
Theoretically, an increase in any one of the factors identified by Sloane would make the management, owners and supporters happier. The more closely the explanatory variables are correlated with each other the more probable it is that the predictions of the utility maximising and profit maximising models resemble one another ultimately making it difficult to distinguish between the objectives of clubs (Downward et al 2009).