CHAPTER 1

PLAYER SALARY DEMANDSINCREASE TICKET PRICES

It bothers me enormously that no longer can a family of four see a game.What's happened is the [player] salaries are so high, we have to keep raisingticket prices. I don't want to raise my prices again.

—Abe Pollin, former owner of the Washington Wizards and Capitals (Heath, 1997)

INTRODUCTION

If even an owner says it, shouldn't it be true? No wonder fansbemoan what they think are the facts. First, fans bemoan thattickets are too expensive. The Fan Cost Index is a sort of CPI forlive attendance at North American pro sports games publishedby Team Marketing Reports (www.teammarketing.com). Their"sports market basket" for two adults and two children includestickets, refreshments, parking, and souvenirs. While not all fansincur all of these expenses every time they attend, the index is usefulfor comparison between teams and over time. We choose theNFL because it is the most expensive (the most recent Fan CostIndex data are for 2011). The New York Jets topped NFL averageticket prices for 2011 at $120.85, and the New England Patriotstopped premium ticket prices at $566.67. Adding in the rest ofthe basket, the price of the 2011 sports market basket for the NFLranges from Jacksonville at the bottom, $316.50, to the Jets at thetop, $628.90 (the average was about $427). Taking the averagefamily to some pro games looks more like a trip to Disneylandthan the trip to the stadium their parents might remember as kids.

Second, what do fans observe at the same time? Players continueto enjoy huge salaries and salary increases over time. (As longtimeobservers of the player pay scene, we agree that this is true.)With the help of statements by team owners (see the epigraph),and laments by sportswriters/broadcasters about the "corporatization"of sports attendance, fan arithmetic jumps to two plus twomust equal four; player pay must be the cause of the increasedprices they face. The easy explanation is that players are greedy (orat least tough negotiators) and that the only thing owners can dois to pass the expense on to fans. How else can owners still make ago of it in the face of these staggering results for players?

This myth rests on a complete misunderstanding of the mostbasic Econ 101 reasoning. The root cause of higher ticket pricesand everything else in the sports market basket is not player salary.Player salaries rise because fans over time have shown a remarkablewillingness to pay ever-increasing amounts for sports attendanceover time, both at the gate and on TV or over the Internet. Inother words, fans don't face increasing ticket prices because salariesincrease. Salaries increase because increases in willingness to payfor sports characterize fan demand over time. The data bear thisout and refute the myth as well.

Three other Econ 101 mistakes are as follows. First, as is generallyhuman nature, no comparison is ever thrown into the discussionof what "high" price even means. Without any context, thisis the same error that people make lamenting the high price ofgasoline. Is it really (in the economic sense of the word) higherhistorically, or compared with other goods? Second, before fansget too carried away, they should sit down with economists andponder this. There is a good economic reason that prices shouldbe even higher (!) in leagues in which there are sellouts. Finally,despite the fact that many owners generate nifty profits from theirteams, it is the case that owners would lose money—that's right,lose money—rather than just take lower profits by lowering someticket prices.

The destructive power of this myth is that it drives an evenwider wedge of resentment between fans and players than alreadywould exist without the myth. Some begrudge high pay to thosewho receive it, and sports fans are no different. Just listen to fanswhen "bonus baby" rookies or newly acquired star free agents failto perform up to expectations. The heckling invariably includesshouts of "overpaid!" It is clearly the sentiment of many fans thatplayers are overpaid during contentious collective bargaining episodes,such as those that have plagued every sport over the lastfifteen years. The myth that this then also means fans are payingmore adds insult to injury. This wedge of resentment serves ownerswell during collective bargaining, where sometimes judicialand even political intervention, fueled by public sentiment, canenter into the process.

MYTH BUSTING

Even intuitively, those who buy into the myth should feel asense that something is wrong. If owners could simply raise ticketprices to cover some cost increase (such as an increase in salaries),why wouldn't they raise ticket prices even without any cost increase?And one simple data comparison adds to what should be abothersome intuition. Figure 1.1 shows that player salaries have faroutpaced ticket prices. Data are not available over a long enoughperiod to make any long-term conclusions in the NFL and NHL,but data from the NBA and MLB show that since the 1950s and1960s player salaries are now about ten times higher relative to ticketprices. So while ticket prices and player salaries have both clearlybeen on the rise, something else is certainly going on with playersalaries. If owners were increasing ticket prices to cover player costs,then fans would be very fortunate that teams have been able tocome up with other revenue streams, especially media revenues,because if those revenues were not available they would have had toincrease ticket prices by much, much more to cover player salaries.

Before we move on, it is important to acknowledge (remember)two things about pay in pro sports. First, if we were to lookover an extensive period of time, the advent of free agency has dramaticallyaffected player pay. Under "reserve clauses" in sports, theonly time players could change teams was to follow their contract.Through litigation and collective bargaining, these reserve clauseswere modified to create free agency for players after a certain numberof years in the league. As one would expect, once players areable to sell their services to the highest bidder, salaries increased.But this is an "earthquake level" event in salaries, shifting all pay,rather than the type of annual change over time that is the pointof the myth.

The second overarching factor to consider is that player pay istied by formula to revenues in three of the major leagues (all butMLB) through payroll caps. Through collective bargaining, ownersand players decide how to split up sport revenues. The sharethat goes to players is then divided equally across all teams, andthat is the so-called payroll cap. So players are restricted in theirsalary demands by the room that any given owner has under thecap in any given season. This is a nice segue into our main point:it is revenues that determine player salaries.

The chain of economic occurrences goes like this. Owners determinehow much more fans are willing to pay for games andrelated goods and services (concessions, parking, memorabilia) atthe gate and for games on TV. In Econ 101 terms, this is an increasein demand for the final sports product at the gate and on TV.Note that if nothing else happened, prices at the gate and for TVviewing would rise just because of this shift in demand. This hasnothing to do with player pay at all ... yet. But there is more.

With a modicum of competition for player services, ownersuse this increase in revenue to bid among each other for playerservices, bidding up pay to players. In Econ 101 terms, this is anincrease in the derived demand for player services. (One interestingthing about pro sports talent is that its availability doesn't changemuch with a change in price, so what fans typically see is the sameplayers paid more than were previously. While this can be a head-scratcher,we all love it when we are simply in higher demand andour pay goes up while we do the same job.) So it is true that ticketprices and player pay go up at about the same time. But the causalityis from revenues to player pay—that is, from the fact that fansare willing to pay more in the first place.

Now, the culmination of all of this is that player pay representsa cost to owners. So the final step in the economic chain of eventsis that the cost function for owners shifts up as well. So in additionto the fact that increased fan demand raises prices to fans, the increasein cost is partly passed on to fans as well. It is a bit of a technicalissue, but owners cannot pass on the full cost of the payrollincrease; demand slopes down, price rises, and owners don't raiseprice to all fans because some fans buy less as the price increases.

So the outcome is, as fans see it, that both prices and salariesgo up. But the causality is not at all as portrayed by some ownersand taken for granted by fans. Rather than salaries causing ticketprice increases, it is ticket price increases that cause salaries to rise.The same is true for television and the growing presence of sportsthrough streaming media, by the way. Increases in fan willingnessto pay for games under the standard fee structure and under premiumfee structures actually raise the price of those TV offerings.Players will also earn a part of this increase in revenues, but it isthe increase in willingness to pay that starts the whole chain ofevents in motion.

As is always the case with myths, the data reveals this one forwhat it is. First, let's look at just recent history, sport by sport,where "recent" is defined by the latest available average salary dataat USAToday.com or ticket price data in Team Marketing's FanCost Index. For MLB, recent is 2011 and 2012. MLB average salarychanges ranged from a decrease of $1.6 million for the Cubs to a$2.2 million increase for the Marlins, with an average change of$96,916. The average percentage change across all the teams was11.3 percent. Changes in the Fan Cost Index average ticket priceranged from a decrease of $11.67 for the Angels to a $10.56 increasefor the Tigers. The average change was only $0.06, and the averagepercentage change across all teams was only 2.1 percent. Finally,the correlation between average salary changes and average ticketprice changes across all teams for these two years was 0.01, essentiallyzero.

Looking behind these summary statistics shows why. Of theseventeen teams that showed average salary increases, four actuallylowered their prices in nominal terms and, with inflation rightaround 2 percent, five more owners did not increase their ticketprices by greater than the rate of inflation. Thus, in total nine ofthe seventeen teams with increased payrolls actually lowered theirprices. Of the thirteen teams that lowered their payrolls, four raisedticket price by more than inflation, counter to the requirementsof the myth. Thus, in total, thirteen of the thirty MLB teams (43percent) behaved counter to the myth for the 2012 season.

Performing the same comparison for the other three leaguesgenerated the following results. Average NBA salaries (recent is2009–10 and 2010–11) fell 14.2 percent, ticket prices fell 2.6 percent,and the correlation between payroll changes and ticket pricechanges was a negligible 0.24. Sixty percent of NBA teams behavedcounter to the myth. In the NFL (recent is 2009 and 2010),average salaries fell 2.6 percent from 2009 to 2010, average ticketprice fell 1.5 percent, and the correlation between payroll changesand ticket price changes was still small, at 0.38. Forty-one percentof NFL teams behaved counter to the myth. Finally, payrolls rose5.8 percent in the NHL (recent is 2010–11 and 2011–12), averageticket price fell 1.0 percent, and the correlation between payrollchanges and ticket price changes was a strong 0.78. Thirty-sevenpercent of NHL teams behaved counter to the myth. In summaryacross the leagues, between 37 and 60 percent of teams behavecounter to the myth in the most recent data on average salariesand ticket prices. Any correlation between changes in average salariesand changes in ticket prices is small in three of the leagues. Inthe other, the NHL, the high correlation attests not to the mythbut to the fact that ticket revenues are the largest proportion oftotal revenues in the NHL, compared with the rest. Rest assuredthat this summary also is true for a significant number of teams ineach league back in time.

In fact, even earlier reports by USAToday prior to the Internet,show that the average MLB player salary was $19,000 in 1967,and it was $1,895,630 in 2000. So in nominal terms the averageplayer salary was one hundred times what it was thirty-threeyears earlier. Again, getting reliable data is an issue, but it appearsthat ticket prices increased by less than ten times (still in nominalterms) over the same time period. If ticket prices must rise tocover ever-rising salaries, there is quite a large deficit issue revealedhere. Other sports tell a similar story. For example, Fort (2011, ch.7) has shown in his textbook the history of the behavior of salariesand ticket prices over the years for the pro teams in Boston. Thesame myth busting result occurs—over different periods of timefor different sports in Boston, real ticket prices either stay constantor fall, and salaries continue to rise (the most startling example isthe NHL's Boston Bruins). The relationship between salaries andticket prices required to support the myth simply is not there.

Thus, rather than appeal to weak argument and claim that therest of the teams at least behave according to the myth, the Econ101 explanation explains these other teams as well. All you haveto do is turn to the rest of the revenue streams, as we alluded tofor the NHL. Salaries increase at much greater rates than ticketprices because ticket prices represent only a part of the revenuestreams that players help to generate. When increases in TV andInternet revenues are added to the picture, it is easy to see whysalaries outpace ticket price. The data tell us that player salariestend to increase when players gain free agency, or when revenuesdramatically increase with a big new media contract. So the Econ101 explanation explains it all, while the myth explains at best ashare of the outcomes for teams in pro sports leagues.

Looking at team-by-team payrolls within a league also helpsconfirm the causality we show. Within a league there is a correlationbetween market size, ticket prices, and player salaries. Placeslike New York and Los Angeles tend to have higher ticket pricesand higher payrolls because they are larger markets. Certainlyplayers are not greedier in bigger markets. Owners in large marketsare not wealthier, either. For example, the wealthiest sportsowner, Paul Allen, owns the Portland Trailblazers, not exactly thelargest NBA market. The reason payrolls and ticket prices arehigher in large markets is that those markets have higher demand.There are more fans willing to pay high prices to go to an MLB orNBA game in New York than in Toronto. Therefore ticket pricesare higher, which creates a greater incentive to win, which createshigher payrolls. Furthermore, demand for the NHL is highin Toronto. And guess what, the highest ticket prices in the NHLare in Toronto, followed by another hockey crazed city, Montreal.While this has not translated into the highest payroll in the league(this might be explained by Maple Leaf fans going to games win orlose, thus reducing the team's incentive to win), higher ticket pricesin Toronto shouldn't be blamed on high player salaries. Thereare typically counterexamples to these situations, but most of thetime large markets create more fan demand, which leads to higherticket prices, which leads to higher payrolls.

THREE OTHER MISTAKES

So, Econ 101 reasoning busts the myth that rising player salariescause rising ticket prices. But there were three other related issuesraised earlier as well ...

What does "high" price mean? Here we bring both a sense ofhistory and the simple but exceptionally important economic toolof inflation adjustment into play. For example, in the NFL casein the introduction, perhaps it has always been true that a trip tothe stadium has cost about the same as a trip to Disneyland. Andperhaps the actual cost of either one hasn't risen any more thanmost other things. The only way to know is to look at history andinflation. For example, New England at $117.84 is right behind theJets' top ticket price, but the Patriots have not changed this pricesince 2008–09. So ticket price did not rise even though player paysurely did over the last few years, and, actually, this represents a decreasein price adjusted for even the low inflation we observe lately.As another example, adjusting for inflation, the average fan costindex in both the NBA and NHL was higher in 1998 than 2010.