DEPARTMENT OF ECONOMICS ISSN 1441-5429 DISCUSSION PAPER 07/15 Stadiums and Scheduling: Measuring Deadweight Losses in Professional Sports Leagues, 1920-1970 Lionel Frosta, Luc Borrowmanb and Abdel K. Halabic Abstract: In studies of professional sports leagues it has not been possible to quantify losses of economic welfare (deadweight losses) because of the absence of a counterfactual. Before 1970, Australian Football’s major league, the Melbourne-based Victorian Football League (VFL) set standard admission prices for all games and scheduled matches to distribute revenue evenly between clubs. Almost all of the League’s teams were based in one city, with all but one playing home (or regular season) games at small stadiums with limited facilities, while the city’s largest and best equipped stadium lay vacant every second weekend. By estimating demand for matches between the five highest drawing clubs over a 50-year period, we specify the size of revenue losses that resulted from different schedules and venues. The results show significant losses in League revenue and attendances, but these were not sufficient to threaten the survival of a distance-protected cartel. Fixed pricing created welfare gains for supporters of the larger clubs and welfare losses for supporters of the smaller clubs, and was not conducive to an even competition. Keywords: Sports, football, cartels, stadiums, scheduling, pricing JEL Classification Numbers: D42, L1, L830, N97 a Department of Economics, Monash Business School, Monash University; [email protected] b School of Business and Economics, Monash University Malaysia; [email protected] c Faculty of Business, Federation University Australia Gippsland Campus; [email protected] © 2015 Lionel Frost, Luc Borrowman and Abdel K. Halabi All rights reserved. No part of this paper may be reproduced in any form, or stored in a retrieval system, without the prior written permission of the author monash.edu/ business-economics ABN 12 377 614 012 CRICOS Provider No. 00008C 1 INTRODUCTION Sports leagues operate as cartels, the behavior of which, as Vamplew (2007) observes, depends on the drawing up and enforcement of rules that reflect the values of the rule makers. Leagues generate increased demand through fixed schedules of home-and-away matches, tables that show the rank order of teams, and rules that restrict club profits and the mobility of players to prevent strong clubs from dominating the competition (Neale 1964). However, league decisions about the venues and times at which matches are played, ticket prices and the admission of new teams may result in incomplete markets that fail to provide the product to all consumers whose willingness to pay is higher than the market price. Cartels are inherently unstable, because setting prices above marginal cost provides an incentive for individual firms to ‘defect’, through price shaving to increase demand (Stigler 1964). Stigler’s (1958) ‘survivor principle’ suggests that a cartel is an optimum market structure if cost and efficiency advantages allow it to maintain or expand market share in an industry over time. Because cartel survival depends on the development of effective mechanisms to monitor and enforce agreements and distribute profits to members, duration is the simplest and most common measure of cartel success (Levenstein and Suslow 2006). Until the 1950s, and in some cases the 1960s, all sports leagues supplied products that were largely non-tradable. Apart from limited newsreel and television coverage, markets did not exist for potential consumers who could not watch a sports event in person. Leagues operated in regional markets that were protected from import competition, and while this distance protection fostered cultures of intense local fan loyalty, it also tended to entrench conservative cartel behavior that restricted the size of markets and the total surpluses they generated. While distance protection was conducive to the survival of cartels, it also encouraged reduced output levels as consumers dropped out of markets, creating deadweight losses. 2 Szymanski and Zimbalist (2005) draw a distinction between the evolution of American baseball’s major league as a profit-oriented organization that drove competing leagues out of business, and that of soccer, which retained a broad federation of competitive clubs. Soccer clubs primarily sought to maximize the utility derived from winning matches, and were willing to accept league restrictions on the profits they could make. British football leagues set minimum admission charges, which prevented clubs from reducing prices to increase attendances at less attractive matches (Vamplew 1988; Tabner 1992). Until floodlights were approved for use in the English and Scottish leagues in 1956, midweek matches were played in the afternoon, when only fans who were able to take time off work could attend (Pierce 2006). Although baseball and American football team owners sought to maximize profits, their leagues opposed the relocation or establishment of franchises in western and southern cities (White 1996; MacCambridge 2004). In the first half of twentieth century, baseball excluded black players (and a potential black fan base), resisted opportunities to play matches at night, and responded slowly to opportunities to negotiate broadcast agreements for radio and television (Tygiel 2000, 2008). Intuitively, economists would regard such practices as likely to generate suboptimal outcomes. Estimation of the size of these economic inefficiencies requires a comparison of levels of revenue and utility in a cartelized industry with those that would have prevailed in competitive markets. However, such empirical work is constrained by the absence of a counterfactual that would allow specification of true levels of demand and the total surplus that would have been generated had markets been more competitive (Levenstein and Suslow 2006). Discouraged spectators leave no data. Once sports products became tradable and leagues expanded the size of their markets they moved to new production possibilities 3 frontiers.1 As a result it is not appropriate to use revenue from a given time period to quantify earlier inefficient levels of production. It is possible to construct a counterfactual for Australian Football’s major league, the Victorian Football League (VFL). Australian Football is played at an elite level in only one country and developed idiosyncratic rules and practices in splendid isolation. In terms of the rise of professional sport worldwide, Australian Football is an outlier in the general sense of the word. However, this does not mean that its experience should necessarily be discarded from broader consideration of the significance of deadweight losses in distance-protected sports leagues. For most of the period from 1920-1970, the VFL had 12 clubs, 11 of them based in Melbourne, but only one played home (or regular season) games at the Melbourne Cricket Ground (MCG), a large, centrally-located stadium at which the quality of spectator amenities was much greater than that of the smaller stadiums of other teams. The MCG was a latent asset that lay vacant every second weekend until a second club began a ground-sharing arrangement there in 1965. The situation parallels that of London, where seven teams that have played at least 20 seasons in the Premier League or its equivalent are based, but none use Wembley Stadium for League matches. VFL grounds were used for cricket for six months of each year and the League played matches only on Saturday afternoons because State government legislation prohibited play on Sundays. One VFL ground had floodlights, but these were not used for official League matches. No more than one match was played at any venue on the same day. Before 1970, the League scheduled 18 rounds, which in a 12- 1 Pete Rozelle’s strategy as NFL commissioner from 1960-1989 to expand the League beyond its traditional regional boundaries, embrace television as a source of revenue, and equalise the playing strength of member teams, is the pre-eminent example of the successful transformation of a sport (MacCambridge 2004; Oriard 2007). 4 team competition meant that each team played four others only once during a season. The schedule was set randomly, to give every team the same opportunity to attract large crowds. Similar scheduling issues were, and are, faced by America’s National Football League as the length of the season does not allow each team at least one home field advantage in all of its games against other teams. In terms of structure, the VFL occupied a position between the closed cartels of North American leagues and the more organic promotion-and-relegation system of European soccer, which allows teams to join and move up and down the divisions of leagues. The VFL was not a profit-maximizing organization, and its clubs were owned by members, for whom membership was an item of consumption that yielded utility through winning matches. The VFL operated with a fixed number of member clubs, as did North American leagues, and clubs could only join the League when it chose to admit more teams. Poorly performing teams did not face the threat of relegation. Unlike North American teams, VFL clubs did not enjoy territorial monopolies, but drew strong support from the districts in which they had originated.2 Most club grounds lay within a one-hour walk of each other and all were accessible by trains and trams. As in English soccer, teams did not travel long distances in search of profitable