Why are New York Knicks tickets still so expensive even when they are playing poorly?

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1 Why are New York Knicks tickets still so expensive even when they are playing poorly? Dilemma The New York Knicks has the most expensive tickets in the NBA with the average price of a nonpremium seat costing around $123 per game (figure 1). The Los Angeles Lakers tickets are priced around $100 per game. However when you look at the successes of these two teams, the Knicks have won 2 championships, their last one in 1973, while the Lakers have won 16 championships, their most recent in The objective of a NBA team is to win championships by building a team of players who can win games. These players help draw the fans to come watch live games. However, the Knicks have not won a championship for 40 years and their last big name player, Carmelo Anthony, was signed 4 years ago and has not proven to be a championship winning player. In 2013/14 the team went through a losing season and missed out on the playoffs. In contrast, their across town rivals, the Brooklyn Nets, finished ahead of the Knicks and made the playoffs. Their average ticket price was $60 (figure 3), more than half that of Knicks tickets. So why are the Knicks tickets so expensive and why is there still demand when the Knicks are playing so poorly? Is this simply because of higher cost of living in New York City? Why is there a large discrepancy between Knicks tickets and Nets tickets when surely competition should even out the prices? Is this a factor of scarcity, for example demand far outweighs supply? Or are there some other factors at play here that are driving prices up? This report analyses the role that supply, demand and competition plays in setting ticket prices for the Knicks, and presents evidence to answer the pricing dilemma of why New York Knicks tickets are so expensive even when they are playing poorly.

2 Supply The supply of Knicks home game tickets is constant every year. They play 41 games at home, and each game there is a capacity of 19,812. Because supply is kept constant on a yearly basis, there must be other factors that are affecting the prices of these tickets. In examining the factors that lead the Knicks management to price Knicks tickets, we must first look at the cost of living in New York City in comparison to other US cities. New York City has by far the highest cost of living in the United States. According to the Numbeo Cost of Living Index 1, New York City s CPI is 42% greater than that of Los Angeles. Therefore it is expected that Knicks management can charge more than what other teams are charging. Another way to analyse the cost of living in New York City is to look at food and drink prices at Knicks games. In an article that discusses prices of hotdogs and beers 2 sold at different NBA stadiums, the Knicks placed 4 th and 6 th on the list. While they were not number one on the list, being high placed also explains the high cost of living in New York City. However we must also note that the cost of living has a limited effect on ticket prices. For example, the Los Angeles Lakers had the highest average ticket price at around $100 in the 2007/8 season however the cost of living is much lower in Los Angeles. The reason is that the Lakers were in the middle of a golden era with the team winning 5 championships between 2000 and The Lakers had superstars such as Shaquille O Neal, Kobe Bryant and Pau Gasol, which leads us to think that prices may be driven by supply of star talent. While the Knicks are a basketball team competing for championship rings, they are also in the business of entertainment. Similar to other segments in the entertainment industry, big name stars draws crowds, therefore in order to maintain a high level of demand, the management must supply

3 the Knicks with star players. This is exactly what was done for the 2010/11 season. The Knicks signed Carmelo Anthony one of the best players in the league, with the hope that he along with other players, would begin a revival of the Knicks. As such the management team increased average ticket prices by 30% (figure 2) because there was an expectation that the team would be more successful in the coming years. A similar pattern occurred for the Brooklyn Nets, whose average ticket price rose by almost 50% (figure 3) when they moved from New Jersey to Brooklyn and signed several big name players in the 2012/13 season. While it is fair to say that NBA ticket prices are positively correlated to expectations of performance from the team, we must also analyse the consumer s behaviour to understand the consumers willingness to pay when these prices are increased. Demand Since 1992, attendance at Madison Square Garden has been steady, fluctuating between 95% to 100% attendance. After the Patrick Ewing era of the late 90s, the Knicks went into a rebuild phase and attendance in the 2000s decreased, however demand was still much higher in comparison to the Nets who were a much better team than the Knicks in the 2000s. The Knicks high attendance rate can be attributed to two reasons. Firstly, Madison Square Garden is a smaller stadium compared to other stadiums that can accommodate more than 20,000 fans per game. Secondly, a large number of non-premium seats are sold to season ticket holders and scalpers who purchase tickets in bulk ahead of time and flood them on the secondary market. Scarcity of tickets at face value has created the priciest secondary ticket market in the NBA with consumers willing to pay an average of $320 3 a ticket. This is much higher in comparison to face value ticket prices, and one can argue that the Knicks management uses this secondary market as an anchor for setting face value prices for tickets. 3

4 Sellers on the secondary market can price discriminate based on seat location and the team that the Knicks are playing, therefore creating a wider variation for ticket prices. Basically buyers do not have power on the secondary market but are still willing to pay. There are several reasons for this. Buyers willingness to pay is set by their expectations on the team. By acquiring Carmelo Anthony and building a team around him, buyers are expecting the Knicks to win more games. Once the Knicks started winning more games, buyers felt that they were getting a good deal (fairness principle) and justified the increase in ticket prices. A large proportion of secondary market ticket buyers are one time buyers who are often tourists. Tourists compromise on price because they are in the vacation mind set therefore spending $300 for tickets seems fair since it is an one-time payment. Furthermore, these one-time buyers are often there for the experience and entertainment rather than to actually watch basketball, therefore they are more likely to spend more because they value the experience more than a season ticket holder. The nature of the product also affects ticket prices. Carmelo Anthony did play a part in raising prices, but other events played a part too. In the 2011/12 season, the Knicks were in trouble and had lost 11 out of their last 13 games leading up to midway through the season. On February 4 th, an undrafted player called Jeremy Lin was called upon by Coach Mike D antoni to go head to head against All-Star point guard Deron Williams. Lin led the Knicks to victory and that would be the beginning of the Linsanity fairy tale story. This unheralded player would lead the Knicks to a 9-1 run and put them back into playoff contention. During that period, ticket prices doubled because everyone wanted to witness Linsanity. That season average ticket prices rose by 32%. Competition Competition can be analysed in two ways, between basketball teams and with other entertainment options in and around New York City.

5 The only basketball competition that the Knicks has is the Brooklyn Nets. Since moving to Brooklyn, the average percentage attendance rate has increased to 97% (figure 4). However this increase has not had an effect on the attendance of Knicks games which remains close to 100%. This likely means that the fan base of the Knicks and the Nets are largely different and therefore are not in direct competition against each other in terms of price. This shows that Knicks fans are price inelastic. Competition with other entertainment options such as other sports and Broadway shows do not directly affect the demand for Knicks tickets. As stated previously, a large proportion of the buyers of secondary Knicks tickets are tourists and one time buyers. The constant inflow of tourists (47 million per year 4 ) ensures that there is enough demand for Knicks games (only 42 per season) as compared to baseball games (81 per season) and Broadway shows that run all year round. Conclusion From the above analysis, because of consumer willingness to pay that is driven by an expectation of the Knicks winning, has allowed the Knicks management to increase average ticket prices. Even though the Knicks are not performing as expected, ticket prices remain high because the expectation is still there so long as the Knicks has a team that is capable of winning in the eyes of the consumers. Furthermore as discussed previously, price discrimination, the fairness principle, inelastic demand for tickets and one-off ticket buyers also contribute to the high price of Knicks tickets. The demand for tickets and general consumer behaviour has created a large gap between face value prices and secondary ticket prices. Therefore Knicks management has some wiggle room to further increase face value prices. However, they do not want to upset season ticket holders and scalpers in case that the secondary market collapses because of lack of supply. This would in turn decrease the scarcity of face value tickets and potentially decrease demand in the secondary market. 4

6 Appendix Figure 1

7 Figure 2 Figure 3

8 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Average Percentage Attendance of Capcity Knicks Nets Figure 4