Tuesday, December 15, 2009

Why Are NFL Ticket Prices So Low?

In the Fall of 2009, Parade magazine published an article asking if the cost of NFL games is too much? Using anecdotal evidence from the Dallas Cowboys at their new stadium, they author does not really come out with a direct conclusion, but questions if the typical fan will be able to keep going to NFL games. One of the problems with this type of "analysis" is that the author is looking at an outlier (Dallas Cowboys in the 2009 season - who have the highest average ticket prices in the league) to answer this type of question, and thus can get some skewed results.

In an effort to answer such a question, I wrote a paper on NFL ticket pricing cryptically called "Evaluating Inelastic Ticket Pricing Models", in which I ask and answer an issue interesting to academic economists. Here I wish to expand to non-academic economists.

Let me set the background for the paper and also get to why I ask the question in the title of the blog. Sports economists have studied sports team's ticket pricing for years and find in the majority of cases in the majority of leagues and sports that teams set ticket prices in the inelastic portion of spectator demand. This is a surprising result economically. Let's see why. If we assume that sports teams in the US are local/regional monopolists and that they are interested in making more profit as opposed to less profit (i.e. they are profit maximizing), economic theory shows that for a monopolist to maximize their profits, they will set prices in the elastic portion of demand. Yet we find time and again that sports teams set ticket prices in the inelastic portion of demand. When this is the case, we conclude that sport teams could set ticket prices higher and simultaneously increase their profits by doing so. The question then is: why are NFL ticket prices so low?

The above observation has three important assumptions: sports teams maximize profits, sports teams are local/regional monopolists and sports teams sell only tickets. The first two I will also assume, although you can make arguments that each is not true. There has been some analysis as to whether sports teams are profit maximizers or win maximizers and some have questioned the assumption that sports teams are monopolists citing that they compete with other sports leagues and other entertainment options. I have tried to control for this by including the number of other major professional sports teams located in the local market, since I am sympathetic to this critism. What I am really questioning in the paper is whether sports teams sell only one good (tickets), which is obviously not true.

If sports teams sell other goods, such as concessions - hot dogs and carbonated soft drinks - merchadise - big foam hands, caps, etc. - then teams may have a profit maximizing incentive to set the price of tickets in the inelastic portion of demand - and have more fannies in the seats - in order for the opportunity to sell those same fans more hot dogs and caps. I show that this is consistent with profit maximization theoretically and empirically using the 1995 to 1999 NFL seasons.

So, NFL ticket prices are low in order to get more spectators in the venue and that gives sports teams an opportunity to sell more goods once they have entered.

2 comments:

Jeff said...

I'm not sure concessions tell the whole story either.

Sports teams also sell TV rights and merchandise. I don't think I would be a fan of something I couldn't afford to go to at least once in a while. But, setting prices low allows the typical fan to go occasionally, which probably increases their consumption of the TV broadcasts and merchandise.

Sports teams sell fandom, only part of which means ticket sales.

Stacey said...

Jeff,

I agree, which is why (in the paper I wrote) I use non-ticket attendance generated revenues. That did the trick. Read the paper, and you will see, you will see.