Wednesday, June 4, 2008

MISL and the Shutdown Case

On June 2nd of this week, the Major Indoor Soccer League (MISL) shut down operations. MISL has been in operation for seven years and had nine clubs this past season. Even though league financial data is not available, there is an economic concept we can apply to the demise of MISL – the shutdown case.

To start thinking about the shutdown case, let me ask you the following question. Which would you rather lose $50 or $100? If you asked me this question I would say, “I refuse to answer”, or “I would rather not lose any money”. But if I was forced to answer the question, I would rather lose $50.

Now suppose a firm – or in this case a sports league – knows with certainty that their expenses will exceed their income. Should the league always shut down their operations? The short answer is NO!

The league needs to compare the losses from remaining in business with the losses from shutting down – which economists call fixed costs. For a sports league, fixed costs can be costs such as general and administrative costs or property taxes. If the losses from shutting down (i.e. $50) are less than the losses from staying in business (i.e. $100), then the league’s best economic decision is to shut-down. For the MISL it looks as if the costs of shutting down were less than continuing the league.

Does this mean that the league is done for good? Maybe not. League officials are trying to re-organize and start up again in the future. The key to their success is to raise average revenues – such as television contracts or better stadium contracts – and lower average variable (operation) costs.

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