Thursday, June 11, 2009

Real Madrid Offers £80 Million for Ronaldo

I have been silent over the last week or so due to two factors: one is that we have had family visits from both sides of our family - which has been wonderful - and two, I am fevorishly finishing up a paper (with Dave Berri) on evaluating NHL goalies which Dave and I will be presenting at the Western Economic Association meetings this July. The NHL goalies paper has returned me back to some interesting quirks in examining salary decisions in not just the NHL, but US sports in general - one that I plan to take up in the Sports Economics class that I am teaching this Fall here at the University of Iowa. On to the topic for today.

Real Madrid has offered Manchester United £80 million (about $131 million US) in transfer fee to acquire Ronaldo. While European football (soccer) by not be high on most US sports fans lists, for those that are interested in sports economics, it should be. For the past dozen years I have been fortunate to attend the Western Economics Association - this year in gorgous Vancouver British Columbia - and some of the most interesting economic papers come from the analysis of various European football leagues. Whether it is promotion/relegation or transfer fees, European football has much to teach us about the economics of sports.

Real Madrid has been on a spending spree, also offering to acquire Kaka for about $100 million US, and all of this got me thinking about one of the many myths that we focus on in The Wages of Wins - can a team buy a championship? As we demonstrate in the book the answer is no. But European football owners/managers could be thinking about more than just what is happening on the pitch, and also focus on what is happening in terms of profits. While I have heard a lot about US teams seem more focused on profits and European teams seem more focused on team performance, these two deals strike me more about profit enhancement than performance enhancement.

While Real Madrid should be better with Ronaldo and Kaka, an article from CNN seems to indicate that these deals are more about selling merchadise than about team performance, which is consistent with profit maximizing behavior. The problem in determining if this is really true is that there is very little systematic data on merchandise revenues for any sport, and thus while we may have a theoretical model that says this or that - confirming or refuting the model leaves little for an empirical sports economist to do.

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