1 Course: Economics 40 > Economics of Sports > Syllabus Fall 0 Dr. Delemeester Marietta College The Economics of Sports (www.marietta.edu/~delemeeg/econ40) Texts: The Economics of Sports by Leeds and von Allmen (5e, Addison Wesley; 04) Office: 8 Thomas Hall (phone: ) Office Hours: Cell: Twitter: Prerequisite: Economics MTWT :00pm - :00pm (or by appointment) (you can text me if you Course Description and Objectives In this course, we will explore selected aspects of the economics of the sports business. This semester, we will focus on the major professional team sports of baseball, football, football, and hockey. The first part of the semester will be devoted to an understanding of professional sports franchises as businesses: What factors determine franchise profitability and market value, and how central are these issues to owners decision making? This introductory investigation will provide a context for the following sections of the course. The next portion of the course will look at the economics of leagues and sports stadiums. What is the optimal design of a sports league? What role do antitrust laws play in the design of a sports league? Is competitive balance important to a league s success? Why are stadium characteristics so important to profitability? Why have most new (and proposed) professional sports stadiums been heavily subsidized by governments and taxpayers? Finally, the economics of professional sports labor markets will be explored. What determines the salaries of professional athletes? How is this affected by market structure and what are the implications for franchise profitability in different kinds of markets? Finally, we will examine amateur and collegiate sports. With that said, upon completing this course you should be able to: understand the role of markets in allocating scarce resources. o Be able to think in terms of supply and demand o Be able to think in terms of costs and benefits understand the impact of government intervention in the market understand discussions involving the sports business and politics. use simple graphical models to express economic relationships Responsibilities I see my primary responsibility to lead, guide, and motivate a group of committed and dedicated students in the learning process, and to determine the extent to which students have mastered the material covered in this course. I am committed to this task. By signing up for this course, you have accepted the responsibility of being an active learner and of participating in the classroom discussion. Most importantly, students are expected to be committed to learning the subject matter. If you are not open to new ideas, or are not committed, expect your grade to reflect this.
2 Course Requirements and Policies. Exams. There will be three exams given. Exams may consist of essay, analytical, multiple choice, and/or true-falseexplain questions. Make-up exams will not be given.. Homework. There will be at least graded homework/in-class assignments. Only your best 0 scores will count toward your final grade. Make-up assignments will not be given.. Fantasy League franchise management. You and a classmate are required to manage a fantasy league NFL football team and prepare an analysis paper based upon your experience. See details below. 4. Class Attendance and Participation. As a rational adult, you have the ability to weigh the benefits and costs of attending class. However, as an adult, you should view attendance as part of your job. An active learning approach is essential to doing well in this course. Consequently, you should expect to actively ask and answer questions during class. Moreover, your participation is likely to create a positive externality for your fellow students. 5. Academic dishonesty is a breach of the trust that the instructor and your fellow classmates place in you and will not be tolerated. Academic dishonesty includes cheating, plagiarism, theft, or improper manipulation of laboratory or research data or theft of services. A substantiated case of academic dishonesty may result in disciplinary action, including a failing grade on the project, a failing grade in the course, or expulsion from the College" (Marietta College Undergraduate Programs, 0-04 Catalog, p. 0). All suspected cases will follow the procedures outlined in the Marietta College Catalog. Copyright violations are also quite serious breaches of the law. Please visit the MC copyright tips page (http://library.marietta.edu/services/faculty/copyright_tips.html) for further details. 6. Academic support services and resources are available at Marietta College's Academic Resource Center (ARC) located on the third floor of Andrews Hall. 7. Students with documented disabilities should notify the instructor and the Academic Resource Center to discuss their individual needs for accommodation in a timely manner. 8. Co-curricular probation for those on academic probation is in effect. Please refer to the college catalog for details (Marietta College Undergraduate Programs, 0-04 Catalog, p. 6). 9. Your grade will be determined as follows: Grades are allocated as follows: Exams (average of ) 65% Homework 0% (average of your top 0 scores) Franchise Management 5% Grades will be assigned according to the following plus/minus system, using standard rounding methods: Grade A+ A A- B+ B B- C+ C C- D+ D D- F Percent Score
3 Course Outline Chapter Topic Part I Leeds/von Allmen Introduction Leeds/von Allmen Review of the Economist's Arsenal Leeds/von Allmen Sports Franchises as Profit-Max Firms Determine Franchise Owners and Assign Markets and Software Review: August 7 League Constitution: August 9 Business Plan Due: September Free Agent Auction: September Exam : September 4, 0 Part II Leeds/von Allmen 4 Monopoly and Antitrust Leeds/von Allmen 5 Competitive Balance Leeds/von Allmen 6 Public Finance of Sports Leeds/von Allmen 7 Costs and Benefits of a Franchise to a City Part III Leeds/von Allmen 8 Leeds/von Allmen 9 Leeds/von Allmen 0 Leeds/von Allmen Exam : October 9, 0 Labor Markets in Professional Sports Labor Market Imperfections Discrimination Amateur and College Sports Fantasy League Analysis Paper Due: December 5 Exam : December, 0 (8:0am) League Schedule* First Game of the Week Fantasy League Week # September 5 Fantasy League Week # September Fantasy League Week # September 9 Fantasy League Week #4 September 6 Fantasy League Week #5 October Fantasy League Week #6 October 0 Fantasy League Week #7 October 7 Fantasy League Week #8 October 4 Fantasy League Week #9 October Fantasy League Week #0 November 7 Playoff Week # November 4 Playoff Week # November Playoff Week # November 8 *All starting rosters must be submitted by kickoff prior to the first game of the week.
4 Guide to EconFantasy. Getting Started EconFantasy.com is a team Fantasy Sports League. Student teams will have the opportunity to make league and front office financial decisions while also participating in head-to-head on-the-field competition. The simulation uses real NFL players in real time and operates through the fantasy league offered by ESPN. To begin, student teams must be assigned markets to operate in. Students will compete in the EconFantasy Football League (EFL). The EFL is divided into two divisions, East and West, comprised of six teams each. The EconFantasy.com markets and the city's market size index are: Market Market Size Index EAST New York 0.0 Chicago 6.0 Boston.6 Miami.6 Cleveland. Pittsburgh. WEST Los Angeles 8.0 Houston 4. Dallas 4.0 San Francisco.8 Denver. Kansas City.6 Your instructor will serve as a non-participating league commissioner. The commissioner will be responsible for entering the names and identification numbers of all students into the EconFantasy.com database. Once students are assigned to a market and the commissioner has entered their names into the system, students will be invited to "join" EconFantasy.com and register. Students will need their identification number and their assigned market before they can set up a username and password to access EconFantasy.com.. Preparing a Business Plan Our Economics of Sports course will cover the sources of revenue and costs for a major professional sports team [Refer to Chapter in Leeds and von Allmen for details]. In the EconFantasy.com simulation, students will need to, in the preseason, forecast their expected revenues and costs. Students should then generate a business plan for their fantasy franchise. Typical revenue sources in professional sports include media (television and radio broadcasts), ticket sales, concession sales, licensing of merchandise, and stadium sponsorships. Typical costs consist of player salaries, front office costs, game-day expenses, and travel costs. Each fantasy franchise must begin the season by preparing a business plan for the year. Each team owner determines expected revenue and costs, and then prepares a budget for player salaries. The results of the previous year are available to franchise owners. The business plan must be completed by each franchise before Selecting Players: The Free Agent Auction. The Business Plan cannot be completed until after broadcast rights contracts and revenue sharing arrangements negotiations are completed. (See Negotiating TV/Radio Broadcast Rights and Negotiating The League Constitution.) The student franchise owners will then know how much they are willing to spend on player salaries in the free agent auction. Although this activity will occur outside of the EconFantasy.com web site, the commissioner requires each student team to prepare a Business Plan that includes the following: Introduction with statement of a franchise mission
5 Each franchise must write a mission statement. The statement must explain the franchise's purpose and vision. The franchise owner must declare whether they are trying to buy a championship, whether they will try to make a profit, or whether they will attempt to do both. Projected revenue sources TV/Radio Broadcast Revenue is either negotiated individually by a franchise (in which case the revenue is retained by the franchise) or collectively by the league (in which case the revenue is shared according to the league's revenue sharing arrangement). The broadcast rights contracts will be renegotiated throughout the season and will change based on the competitiveness and popularity of the league. Merchandising Revenue is divided among franchises according to the league's revenue sharing agreement. Total league merchandise revenue is determined by the competitiveness and popularity of the league. Ticket Revenue will be divided between home and away teams for every contest according to the league's revenue sharing arrangement. Ticket revenue will be determined by attendance. Attendance will be dependent upon ticket prices, the popularity and success of the home and away teams, and the size of the local market. Ticket prices in four separate sections of the stadium (lower, middle, upper, and luxury) will be set by the franchise owner and may vary for each individual contest. Concessions Revenue will be divided between home and away teams for every contest according to the league's revenue sharing arrangement. Concessions revenue will be determined by attendance. Attendance will be dependent upon ticket prices, the popularity and success of the home and away teams, and the size of the local market. Concession prices for hot dogs, nachos, beer, and t-shirts will be set by the franchise owner and may vary for each individual contest. Stadium Sponsorship Revenues are not shared (each franchise receives an individual sponsorship contract) and are only collected for the regular season. For weeks and each franchise will receive a $ million sponsorship each week. For each week through 0, the teams will receive offers for sponsorships. Each team will receive a menu of contracts to sign based on the number of weeks remaining in the regular season. If there are six weeks remaining, a team will receive six possible contracts: a one week contract, a two week contract, etc. The owner must select one of the contracts. If he/she selects a three week contract, he/she will not receive another sponsorship offer for three weeks. The contracts will be based on each franchise's market base and its on-the-field success to date. The sponsorship decision will allow student owners to weigh the risks of a higher short-term contract with the security of a lower long-term contract. Trades and Deals Revenue should not be budgeted for, but it may be a source of revenue for a franchise during the season. All franchises will have opportunity to trade players and include cash as a component of the deal. All revenue sharing arrangements may be renegotiated at any time during the simulated season. Projected Costs Player salaries are typically the greatest expense for a professional sports franchise. Students use their revenue and cost projections to budget for player salaries. Each franchise will use their budget to assist with Selecting Players: The Free Agent Auction. The auction will occur outside of the EconFantasy.com site, and the commissioner will enter each franchise's total payroll for the season. The system will split the amount over the -period regular and post season and enter the amount into each franchise's financial statement. Each owner should realize that throughout the season, as franchises trade players, a franchise's payroll may change. Team Administration is an expense that every franchise must pay to manage a front office. It is a fixed expense, and each team will pay the same administrative expense for the fantasy season. This is a fixed $500,000 per week per franchise. The commissioner can change this number at the start of the season. Game-day expenses (vendors, concessions, and parking) is a fixed expense, and each team pays the same game day expenses for each home game during the season. This is a fixed $500,000 for each franchise when they are a home team. The commissioner can change this number at the start of the season. Travel expenses is a fixed expense that a franchise pays to travel for an away game. Each team will pay the same travel expense for each away game during the season. This is a fixed $00,000 for each franchise when they are a visiting team. The commissioner can change this number at the start of the season. Trades and Deals Costs should not be budgeted for, but it may be a cost for a franchise during the season. All franchises will have opportunity to trade players and include cash as a component of the deal. League Fines - The commissioner can fine any franchise any time for any reason. Executive Summary Students prepare an executive summary to reiterate their projected budget for player salaries and their expectations for profits.
6 . Negotiating the League Constitution (including revenue sharing arrangements) The student franchise owners must write a league constitution. They must decide how to initially share league revenue and how to make adjustments to this agreement later in the season. Franchise owners must also decide whether they wish to implement a cap on payrolls. Franchise owners will report this agreement to the commissioner before the season begins. The student franchise owners must decide how revenue will be shared in the league. The teams determine how broadcast revenue, ticket revenue, concessions revenue, and merchandise revenue will be shared among franchise owners. Because teams are located in markets with varying degrees of attendance and television draws, the owners must decide how to fairly distribute revenue. Being the sole provider of football entertainment in the United States, the league has the ability to extract monopoly rents from the television networks that broadcast its games. If franchises negotiate as a group, they have the ability to work as a monopoly league. If franchises negotiate their broadcast rights individually, they will compete with one another for the networks' money. In order to provide a multi-season experience in the EconFantasy.com simulation, the networks will recalculate the broadcast rights contract each week based on the competitiveness and popularity of the league. Franchise owners may change their decision to negotiate individually or collectively at any time during the season. The teams discuss revenue sharing alternatives and salary caps, and they illustrate their implications on competitive balance in the league. The franchise owners must include in their constitution how they will agree to change a previous agreement. In other words, a rule change may require a majority vote, two-thirds vote, or a unanimous vote. 4. Selecting Players: The Free Agent Auction Most traditional fantasy football leagues begin with fantasy owners selecting one NFL player at a time (according to a predetermined draft order) until all team rosters are full. In the EconFantasy.com simulation, the commissioner conducts a free agent auction to distribute the players. Before the auction all of the student franchise owners are required to finish their business plans, so every franchise has a budget limit for player salaries. All Fantasy teams must have 4 contracted players on their roster. Each team must have 7 players active for each week. Quarterbacks - starts each week 4 Running Backs - start each week 4 Receivers - start each week Kickers - starts each week Teams (Special Teams and Defense) - starts each week The auction will take a considerable amount of time (at least hours), and will take place on September, 0. The teams take turns placing an NFL player "on the block" by announcing an initial bid for the player. Every team then has an opportunity to sign a contract with the player by being the highest bidder. The minimum bid increment is $00,000. Each team may only make two bids on a given player. At this stage, the contracts are simple - the contracts are guaranteed, there are no injury contingencies, and there are no bonuses. The auction continues until all owners field their teams. Once the auction ends, the commissioner will enter each franchise's total payroll into EconFantasy.com.
7 5. Managing Weekly Head-to-Head "on-the-field" Competition Once the franchise owners fill their rosters, they are ready to begin the ten-week regular season. EconFantasy.com will handle all of the financial aspects of the league simulation, and all of the fantasy competition will be managed by ESPN. EconFantasy.com is based on the following fantasy scoring system. Each week owners will submit a starting lineup (see above). These players will accumulate points according to the chart below: Passing: Each 0 passing yards Completion Touchdown 00 yards and over point conversion Interception 6-5 Kicking: Field Goal( 0-9 Yards) Field Goal(40-49 Yards) Field Goal(50 and Over) PAT Missed Field Goal( 0-9 Yards) Missed Field Goal(40-49 Yards) Missed Field Goal(50 and Over) Missed PAT Rushing: Each 0 rushing yards Carry Touchdown 00 Yards and over Point Conversion Receiving: Each 0 receiving yards Reception Touchdown 00 Yards and over Point Conversion 6 6 Defense and Special Teams: Interception/Fumble Recovery QB Sack Blocked Punt, FG, or PAT Total Points Allowed ( 0 ) ( - 6) (7 - ) (4-7) Total Yards Allowed (0-99) (00-99) (00-99) Touchdown Safety Setting Prices for Tickets and Concessions Each week the fantasy football teams play the other teams in their division in head-to-head competition with one team hosting the "game" in their stadium. EconFantasy.com allows the home team to set prices for the event in their arenas. In the simulation the pricing decision can be changed from game to game so that the students experience the challenges that owners face in the offseason. Each section in the stadium has a distinct demand function, and students are not made aware of the specifics of this function (i.e. luxury boxes are certainly more price inelastic than the seats at the top of the arena). The demand for seats in a section is not only a function of price, but of the past performance of the home and visiting teams, the "big name" stars on each team, and the population in the market. The results each week allow students to examine price elasticities and their relationship to an optimal pricing decision. The seating capacity for each of the four sections is as follows: Upper Deck 5,000 Middle Deck 0,000 Lower Deck 0,000 Luxury Box 5,000 Total 70,000 Franchise owners also having pricing responsibilities for the four concessions: hot dogs, nachos, beer, and t-shirts. For your information, the marginal cost of concessions is $ for beer, $0.5 for hot dogs, $0.5 for nachos, and $4 for t-shirts. The student franchise owners are not privy, of course, to the demand functions. As a topic in the Economics of Sports course, an instructor may ask students to estimate the demand functions by collecting attendance data from the league and generating an OLS regression. Students choose independent variables and attempt to determine the effects of these variables on attendance. The analysis will assist owners in determining their optimal prices to maximize attendance revenue and concession profits.
8 7. Financial Statement EconFantasy.com populates a financial statement for each of the franchises, compiles a league total financial statement, and develops a financial management scorecard for each franchise. 8. League Playoffs Upon completing the 0-week regular season, a -week playoff season will commence. The top 4 teams in each division advance to the Championship tournament. The division champions will play each other in the EFL Finals. The bottom teams in each division will play single elimination games to determine the ultimate winner of the EFL Toilet Bowl Game. Trophies will be awarded to the winners of each Bowl Game. In addition, a trophy will be awarded to the Best Financially Managed Team. [Note, the best financially managed team is not necessarily the team that earns the most profit!] 9. Fantasy League Analysis Paper General Information Concept: The purpose of the simulation and has been to give you experiences that expose you to the economic decision-making that professional sports team managers undertake. The purpose of the analysis paper is to give you an opportunity to reflect upon what you have learned, and to integrate the simulation with the theoretical material developed in class and the text during the semester. In the paper, I will be looking for: Evidence of active participation in the simulation and depth of introspective analysis. There is no minimum page requirement - write what you need to crisply discharge the assignment - but I would prefer that students keep their papers under 0 pages. Papers should be word-processed using -pt Times New Roman type, double-spaced, left-justified, with numbered pages, spell-checked, and a reference page. Provide a concluding paragraph that describes the division of labor between you and your co-owner. Required Elements General Business Strategy: Discuss in detail your business strategy and how, if at all, your strategy changed during the course of the simulation and why. For example, how did you first approach the athlete labor issue? How did you change your roster as you went along and why? Player Labor Market: Discuss the labor market - how it started and how it evolved during the simulation, and why. Financial Performance: What were your revenues and costs? How important were each type and why? (Graphs are a good way to show this). Pricing Strategy and Demand Function Discovery: Discuss in detail how the pricing strategies used by your team started off and changed during the course of the simulation and why. Note that each of the demand functions is a linear function of the information that you can find in EconFantasy under the "Pricing Data" link. [Bonus points will be awarded to any paper that includes a statistical estimate of one of the demand functions (seating in any of the four sections or any of the four concessions) using regression analysis.] Competitive Performance: How did your team do? (W/L, and fantasy points scored). Who were your big stars? Big busts? Big positive surprise players? League Performance: How much did the league (your class only) make or lose as a whole? Discuss the league's competitive balance situation by showing a graph of the distribution of winning percentages (and fantasy points scored). What is the standard deviation of this distribution? How does this compare to the ideal standard deviation? What was the correlation between winning percentage and team revenues? Did the big market teams perform better on the court? League Institutional Rules: How did league institutional rules affect your team's financial and competitive performance? What would a salary cap have done? What impact did the degree of revenue sharing have on your decisions? What would a luxury tax have done? Final Reflections: Summarize what you learned during this simulation. Has it changed the way you observe pro sports? If so, how?
9 Name: Writing Assignment Assessment Criteria Content Low High. Paper responds fully to the assignment, i.e., paper includes required elements. Economic issues are described clearly and correctly Appropriate data is collected and organized Effective use of charts/tables Evaluation is supported by the analysis Overall assessment of content Writing quality, grammar, spelling 7. Sentence structure is good Paper makes correct use of punctuation Paper is free of spelling errors Paper is free of errors in word choice Percent score: Your grade will be calculated as a weighted average of scores assigned to items -0. Items and 7-0 are worth percent each. Items -5 are worth 5 percent each. Item 6 is worth 5 percent. Your percentage score on the paper is determined by calculating your weighted score as a percentage of ten.