Ticket Prices and Athlete Salaries Negatively Affected

¶ … TICKET PRICES AND ATHLETE SALARIES NEGATIVELY AFFECTED PROFESSIONAL SPORTS?

Professional sports are a multi-billion dollar global industry and these events contribute a great deal to a nation's economic performance. As the global economy continues to recover from the lingering aftershocks of the Great Recession of 2008, though, the pressing issues of skyrocketing ticket prices and athlete salaries and how they have negatively affected professional sports have assumed new importance and relevance for public policymakers. Because sports fans are confronted with a number of factors in formulating their decision whether to attend a professional sports event or not, the pricing of tickets requires a careful assessment concerning how much should be charged. Ticket prices, though, are affected by several additional factors such as the size, level of affluence, and demographic composition of the sports teams' markets, as well as the prices charged for concessions, parking and most especially athlete salaries and other payments which account for the lion's share of most sports teams' costs. To determine how these factors have negatively affected professional sports in recent years, this paper provides a review of the relevant peer-reviewed and scholarly literature concerning ticket prices and athlete salaries, followed by a summary of the research and important findings in the conclusion.

Review and Analysis

Background and Overview

Given the enormous amounts of money that are involved, it is not surprising that there has been growing interest in ticket pricing regimens and rising athlete salaries in recent years; however, there remains a dearth of statistical data for some types of sports that constrains the ability of researchers to assess the impact of these trends. For instance, according to Coates and Humphreys (2007), "The demand for attendance at major league sporting events has been the subject of a great deal of empirical research over the years. An important barrier to much of this research has been the lack of a long time series of ticket price data, especially for professional football and basketball" (p. 161). Because these two sports in particular account for much of the professional sports revenues in the United States (Szymanski, 2009), identifying the relationship between ticket prices and athlete salaries and their effect on game attendance and fan perception has become a priority for public policymakers. In this regard, Coates and Humphreys (2007) report that, "Knowing the effects of these other prices is quite important for public policy reasons. Many researchers find inelastic demand for attendance in professional baseball, despite franchise monopolies, because multiple products -- most notably, local television broadcasts -- are being sold" (p. 162). While proponents of autonomy among professional sports teams maintain that these organizations should be free to set their prices as the invisible hand sees fit, there are some important factors that are involved that transcend the profitability of an individual team. For instance, a study by Swindell and Rosetraub (1998) found that, "State and local governments have become increasingly responsible for financing many of the new arenas and stadiums demanded by professional sports teams" (p. 12).

During the early 20th century, there was little or no such community-based support available for most professional sports teams in the United States, and the ability of these organizations to sink or swim depended on a combination of their performance and the marketing skills of their owners (Swindell & Rosentraub, 1998). In sharp contrast, though, taxpayers are being forced to pick up the tab for professional sports facilities in one fashion or another, with little in return for their investment besides bragging rights if they are lucky. For instance, Swindell and Rosentraub report that:

It has now become commonplace for cities, counties, and states to use a combination of broad-based taxes (e.g., sales and property taxes) or special taxes (e.g., taxes on alcohol and tobacco consumption, hotel rooms, and car rentals) to help bad or operate these facilities. In most cases, team owners receive the vast majority, if not all, of the revenues produced by each facility. (1998, p. 186)

Although there are some exceptions to these trends and some professional sports teams still finance their own facilities, these are becoming increasingly rare and current signs indicate that more and more local and statement governments will be compelled to not only help finance these facilities, but assist with their ongoing operations thereafter, again with little in return for their investments. In this regard, Swindell and Rosentraub (1998) emphasize that, "There are some privately built arenas and stadiums, but these are the exception. Arenas and stadiums have become large capital responsibilities for most of the governments that host one of North Americas major sports franchises; several local governments now have invested more than $500 million in these facilities" (p. 187). At present, there are about 135 major league franchise teams operating in 50 or more of North America's metropolitan regions (Swindell & Rosentraub), so there must be some overarching rationale that continues to reinforce these trends and these issues are discussed further below.

Direct and Indirect Benefits of Investments in Professional Sports Teams

Local and statement government policymakers have cited a wide range of factors in support of their investments in professional sports teams. In sum, professional sports teams are believed to:

1. Generate economic growth through high levels of new spending in a region;

2. Create a large numbers of jobs;

3. Revitalize declining central business districts; and,

4. Change land-use patterns (Swindell & Rosentraub, 1998, p. 12).

Beyond the foregoing direct benefits, advocates of investing in professional sports teams also cite some indirect benefits, including:

1. Enhanced civic pride: The celebratory atmosphere created in a city when a team wins is another benefit even for people who do not attend games. In a society where sports are a dominant cultural icon, teams do create a level of recognition that generates pride for residents of a community.

2. A high-profile image and identity: Proponents for the building of professional sports facilities frequently note that the image of many cities is frequently defined by high-profile teams and sporting events (Swindell & Rosentraub, 1998).

Taken together, the cumulative effect of these direct and indirect benefits can be reasonably concluded to affect the ability of professional sports teams to command higher prices for their tickets, concessions, parking and other ancillary activities that support professional sporting events and these issues are discussed further below.

Price Elasticity of Professional Sporting Events

Many, if not most, sports fans believe that skyrocketing player salaries are responsible for rising ticket prices in most venues. For instance, many sports fans argue that "Athletes are spoiled, overpaid brats whose salaries are driving up ticket prices" (Barrett, 1999, p. 59). A study by McCann (2010 found that although sports teams collaborate to some extent to provide competitive football events, sports teams in the NFL, as well as those in the National Basketball Association (NBA), Major League Baseball (MLB), and the National Hockey League (NHL), are still discrete legal entities that have individualized ownerships. These are important issues because they affect the ability of individual teams to set their own ticket prices (McCann, 2010). In this regard, McCann (2010) reports that, "In their individualized capacities, teams enjoy autonomy over ticket prices, stadium leases, and equipment purchases. Within agreed-upon settings, most notably with regard to a salary floor and salary cap on team payrolls, teams also possess autonomy over personnel and salary decisions concerning players, coaches, and administrators" (p. 726). In addition, although professional sports teams also share about 90% of their total revenues, they do not follow the same sharing formulas for various types of revenue, and they do not share their profits, losses, or tax obligations (McCann, 2010). According to McCann, "Teams retain revenue generated by local advertising, local radio, televised broadcasts of preseason games, stadium naming, luxury boxes, club seats, and other increasingly lucrative, location-specific sources. Not surprisingly, teams generate considerably different amounts of annual revenue and likewise possess varying net worth" (2010, p. 727).

Clearly, the extent to which ticket prices are affected by player salaries, then, becomes an important constituent element in pricing levels, with higher salaries demanding higher corresponding ticket prices to support them in ways that still provide the return on investment needed to sustain the team. As Coates and Humphreys point out, "Once the multiple product nature of the franchises is correctly addressed through fuller specification of the revenue functions, then inelastic ticket pricing is implied by profit maximization" (2007, p. 162).

The research to date suggests that ticket pricing remains more of an art than a science, though, but some studies have established a clear connection between rising ticket prices and declining attendance levels at professional sporting events in recent years. In this regard, Jozsa and Guthrie (1999) note that during the period 1990 through 1996, attendance at National Football League (NFL) games increased slowly, but a number of factors have been cited to account for this sluggish performance. According to Jozsa and Guthrie, for example, "Several reasons explain the low growth rates, including the glut of other professional teams at NFL sites, ineffective marketing campaigns, poor bonding with fans, a surplus of low-performing teams, and high ticket prices" (1999, p. 167). Although there remains a paucity of timely and relevant studies in this area, these findings are consistent with the studies to date that have shown that the increase in athlete salaries has affected professional sports negatively because they contribute to the growing perception of these players receiving inordinately excessive and even exorbitant sums in return for their efforts, placing their tickets at levels that are no longer affordable for many average consumers (Jozsa & Guthrie, 1999). For instance, these analysts report that, "Escalating ticket prices may have contributed to lower attendance" (Jozsa & Guthrie, 1999, p. 80). In support of these assertions, Jozsa and Guthrie cite the following:

1. NFL ticket prices averaged $36 in the 1996 season; at $25 a seat, the New York Jets offered the cheapest tickets in the league while the New York Giants, who play in the same stadium as the Jets, set ticket prices on average at $35.

2. Fan support was negatively affected as the Jets realized a 6% increase, and the Giants a mere 1% increase, in home attendance for the 1995 season to the first five home games of the 1996 season.

3. The Oakland Raiders charged the highest average ticket price at $51.

4. The average NFL ticket price increased by 4.7%, or from $41 in 1997 to $43 in 1998; during that year, the Washington Redskins charged the highest average ticket price at $74, up from $36 in 1996, and the Atlanta Falcons the lowest at $32. Thirteen clubs boosted their price from 1997 to 1998 with the Tampa Bay Buccaneers posting an 82% increase.

5. League revenues from club seating rose by nearly 21% in 1998 as the average club seat price increased from $109 to $110 and twenty-five thousand additional seats became available in Baltimore and Tampa Bay (Jozsa & Guthrie, 1999, p. 80).

The ability to charge higher ticket prices, though, depends on a number of additional factors besides just athlete salaries (Drayer & Shapiro, 2009). For example, Jozsa and Guthrie add that, "The size, composition, and wealth of the market in which the team is located affects a professional sports team's performance, home attendance, and profitability" (Jozsa & Guthrie, 1999, p. 80). These assertions are supporting by the findings presented by Jozsa (2003) that showed athlete salaries increasing by 117% in the NBA during the period from 2000-2001, while team revenues grew 100% and the average league ticket price increased 80%. Not surprisingly, Jozsa (2003) found that, "These changes resulted in less attendance and more operating losses for several small-to-medium market franchises" (p. 17).

With increasing numbers of professional sports fans having access to these events on their computers, handheld mobile devices and big screen televisions at home, marketers are faced with some complicated decisions, especially given the concomitant increase in the prices charged for other services at professional sporting events. For instance, according to Jozsa and Guthrie (1999), "As ticket prices have climbed, so too have the costs of parking, food, beverages, and souvenirs sold at games" (p. 167). When some consumers are faced with a choice between buying medicine or food, attendance at professional sporting events becomes even less desirable and professional sports are increasingly becoming the purview of the affluent. In this regard, Jozsa and Guthrie point out that:

[In 1999 dollars] it cost an average family of four roughly 30% of their household's weekly income to attend either an NBA game at $214 or an NFL game at $228. MLB, which charges lower ticket prices because the league plays more games than the NFL or NBA, costs the typical family of four $114 per game or about 16% of its weekly income. The middle-income and lower-income fans are being priced out of the game (emphasis added). (p. 167)

The research to date indicates that there is a relationship between concessions and attendance at professional sports wherein higher ticket prices have a correspondingly strong negative impact on associated concessions purchases; consequently sports team franchises that seek to maximize their profits will price their tickets in the inelastic portion of the demand curve -- and sacrifice some revenue from ticket sales (Coates & Humphries, 2007). Despite the lower prices, most professional sports teams recoup this foregone profit through increased concession sales (Coates & Humphries, 2007). Based on their analysis, Coates and Humphries (2007) conclude that, "Demand for attendance at professional sporting events is quite inelastic with respect to the ticket price. This evidence appears to be at odds with the common idea that professional sports franchises are monopolists whose pricing behavior should be to set prices in the elastic portion of the demand" (p. 162). Professional sports, though, are different than other enterprises because of their unique nature. Indeed, records can be broken and unprecedented plays can occur during any given event, so it is reasonable to suggest that teams that are consistently more successful in attracting and retaining top talent will be able to charge more for their prices, ceteris paribus (Szymanski, 2009). In this regard, Berry, Gould and Staudoha (1996) point out that, "It is easier for a winning team to assure a sellout crowd at stadiums, and they are generally able to charge higher ticket prices" (p. 17).

Moreover, professional sports differ from many other enterprises because of the ability of one or two top performers to propel a team to their respective championship, thereby justifying exorbitant salaries for top performers, at least from the perspective of vainglorious owners. For example, Berry and his associates add that, "Although football owners may have less incentive to win than their counterparts in other sports, they crave personal glory from success of their teams on the field. This can be a powerful incentive to bid for players, however elusive it may prove to be in terms of results" (1996, p. 17). In support of this assertion, these authors cite the examples of the high salaries paid to "Tom Cousineau (Cleveland Browns) and Renaldo Nehemiah (San Francisco Forty-Niners) in 1982, who signed as free agents but without the usual contractual restrictions on free-agency compensation" (Berry et al., 1996, p. 17). It is clear, then, that there are a number of perspectives involved in identifying optimal ticket pricing and athlete pricing regimens and these issues are discussed further below.