Sports teams generate revenues from three general sources: ticket sales, concession sales, and the sale of media rights. To generate maximum profits, teams must possess knowledge about the relationship between ticket prices and attendance at the team level. A host of factors influences the demand for sports, including the price of tickets, fan income, the population of the drawing area, team quality, and the age of the stadiums in which teams play. While each of these factors generally influences the demand for all teams' games in some manner, the marginal impact each has on attendance may vary between teams.
More specifically, the sensitivity of attendance to changes in the price of tickets (the elasticity of demand) and to changes in average incomes (the income elasticity) may vary from team to team. For example, some MLB teams reside in cities without NBA or NHL teams (such as Kansas City) while some reside in metropolitan areas with teams in each league. Some teams reside in cities with one or more teams from the same league, such as Chicago and New York which both have multiple teams in MLB. A large literature on the demand for sporting events exists and there have been some analyses of team-specific attendance (Simmons, 1996) and revenue (Burgers & Walters, 2003; Porter, 1992). Yet team-specific price and income sensitivity of attendance in American sports at the team level has been largely unexplored.
We attempt to fill this gap by exploring team-specific demand for 23 MLB teams. We examine time-series data that allows us to identify specific factors that affect team-specific attendance and to measure the marginal impact these factors have on attendance at the team level. Using an error correction model (ECM), we are able to estimate the elasticities of demand and income for specific teams. To our knowledge, no other paper applies this approach in analyzing MLB data.
We organize the rest of the paper as follows: Section II presents a review of the literature; section III presents the empirical framework; section IV describes the data; section V presents the empirical results; section VI concludes.
Unit Elastic and Elastic Demand Evidence
In American professional sports, researchers generally agree that franchise owners render decisions with an eye towards maximizing profits. In addition, American franchises in the four major sports are granted exclusive territorial rights by their leagues, giving teams a measure of monopoly power in their local markets.
According to economic theory, a single-product firm will generate maximum profits when it produces an amount where the added costs of production (the marginal costs) are just equal to the added revenue from selling the product (the marginal revenue). Moreover, economists have identified a relationship between the marginal revenue and the elasticity of demand. When a firm sells more of a product, its revenue increases, all else equal. However, if the increased sales result from a lowering of the product's price, then the price change gives an offsetting effect on revenue. Do revenues increase, decrease, or remain constant? Knowledge of the elasticity of demand provides the answer to this question.
When the demand for a product is elastic, lowering a product's price causes revenues to increase (marginal revenue is positive). When the demand is unit elastic, revenues neither increase nor decrease (marginal revenue is zero). When demand is inelastic, revenues fall (marginal revenue is negative). Because a firm generates maximum profits by selling where marginal revenues equal marginal costs, a firm facing non-negative marginal costs will set its product price in the elastic or unit-elastic portion of the product demand curve.
If we assume that the marginal cost of allowing a fan into a ballpark is zero (all costs are fixed), then pricing at the unit-elastic point ensures maximum profits. …