Economists Do It With Models

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Reader Question: On How Red Sox Fans Are Like Puppies…

December 10th, 2009 · 14 Comments
Econ 101 · Reader Questions · Sports

I saw this a couple of hours ago on my Facebook News Feed:

Mick Greenwood loves how the Red Sox literally tell us that they’re going to raise the cost and decrease the value. Hey Jodi Beggs – Economists Do It With Models – can you smarten them up, please?

Awwww…I have my friends trained so well- they all know that I welcome the opportunity to tell others that they are being dumb. 🙂 Normally this sort of thing would go in the back of the queue, but Mr. Greenwood, in addition to being one of my best friends, holds an important bargaining chip:

(I may have once told him that, if for whatever reason he ever felt the need to propose to me, his chances of me saying yes would go way up if the World Series ring was used as an engagement ring. I don’t think I realized at the time how heavy the damn thing is, but I still contend that I could make it work.)

I did a little digging to see what it was that he was complaining about here…I didn’t have to look far, since Dan Shaughnessy has a nice little rant on the topic over at the Boston Globe:

John Henry and Theo Epstein are preparing you for the Big Slide. While they continue to raise ticket prices and drain every dollar out of Fenway, they are telling you to put your expectations on the shelf. No more “championship-driven’’ campaign for your Red Sox. The Sox are building a “bridge’’ for the future. They are giving up on competing with those big, bad Yankees.

Okay, now I get the part about raising cost and decreasing value…and I’m a little perturbed that it looks like Mike Lowell is likely heading to Texas. But I digress. Clearly, Mick wants me to make the case that it’s not in the Red Sox’s best interests to be acting in this way. Unfortunately, the scenario isn’t quite that simple. I promised Mick a model, so let’s take a took at the market for tickets at Fenway Park:

The supply of tickets is basically fixed at just under 40,000, since, at least in the short run, the team can’t increase or decrease the number of seats in response to changes in price. The demand for tickets increases as the price of the tickets goes down, but it’s unclear how elastic the demand is. If consumers are more price-sensitive than I am giving them credit for, then the curve would be flatter, and it would be more vertical than I’ve drawn it if customers are less price-sensitive than I think they are. (Mick seems to think that they are not very price-sensitive, since he says “If it’s a move for Halladay then fine, but you can’t announce a ticket raise, a rebuilding year and then trade the fan favorite all within two weeks of each other. I really hope the region reacts the right way…but they won’t.”) In any case, the ticket price is currently set below the price where demand equals supply (just assume with me that there is one representative “average” price that we can talk about), which is why people wait in line to get day of game tickets and go to ticket scalpers and such. This shortage creates that oportunity for scalpers to stretegically snap up tickets and resell them at a profit, since there are people out there who are willing to pay above face value but couldn’t purchase tickets because they were sold out.

Now let’s consider what my friend is expecting to happen in 2010:

The “decrease in value” that he refers to is represented by the shift down and to the left of the demand for tickets- if you’re lowering the quality of your product, people aren’t going to be willing to pay as much for it. It’s that simple. (Again, my friend hopes that Red Sox fans see the reduction in value and vote with their dollars, since that would send an important market signal to the organization.) When you couple the reduction in value with the increase in price, you see that the shortage gets much smaller. It’s unclear how much smaller the shortage gets- it could be as I’ve drawn it here, it could go away entirely, or the changes could even result in a surplus of tickets (read, an end to the Fenway Park sell out streak). It all depends on how price-sensitive Red Sox fans are and how much they are put off by the changes in the lineup.

In a way, this could be good for the Red Sox’s profitability from ticket sales. (Not what you want to hear, Mick, I know…) The organization was clearly not maximizing profit in this channel before, since they were selling the tickets for a lower price than the maximum that the market would support. Now, as long as they can still sell all of the tickets at the higher price, they will be more profitable, especially if they aren’t spending those extra dollars on expensive things like Jason Bay and Mike Lowell. That said, the situation raises an interesting question: Why, if they could sell the tickets for a higher price this whole time, were the prices ever set below market value?

The rationale usually given is that sports organizations don’t find it in their best interests for their teams to be seen as exclusive, or overpriced, or whatever else along those lines, since it hurts the overall size of the fan base as well as revenue and profit through other channels such as broadcasting, merchandise (even though merchandise is subject to profit-sharing), etc. It also could simply be the case that more expensive tickets cause people to clam up when it comes to buying refreshments and other items once they get to the park, and it certainly doesn’t hurt from a PR standpoint to have a long string of sold out games. The important point is that the ticket prices were set to result in a shortage on purpose, so we can infer that the organization believed that that was the overall profit-maximizing thing to do.

The main conclusion is that, even though the higher prices combined with the lower value is likely to result is lower demand for Red Sox tickets, it isn’t necessarily going to hurt, and could boost (if the increases are chosen carefully), stadium revenue and profit. Whether that potential gain outweighs the negative impact on other revenue and profit channels remains to be seen. From the fan perspective, it shouldn’t be surprising that if Red Sox fans are going to be loyal no matter what, they stand a chance of being treated like the puppy that is taken for granted because it’s always happy to see its owner regardless of how the owner treats it. Note to Sox fans: Stop acting like that puppy and the organization will have an incentive to actually take your preferences into account.

Tags: Econ 101 · Reader Questions · Sports

14 responses so far ↓

  • 1 AJP // Dec 14, 2009 at 1:01 pm

    Intro micro once again proves it’s usefulness!

    We at the forecasting center I work for have garnered quite the reputation for using simple supply-demand diagrams to great effect in our reports – glad to see you like them as well!

  • 2 Ryan // Dec 17, 2009 at 3:19 am

    Given the recent happenings the tone of Red Sox Nation might be different. The Red Sox can justify high ticket prices (even if its not market value) as long as the team wins games. As constructed the 2010 team is going to be very good, just not flashy like Matt Holliday or Adrian Gonzalez would make it. Besides, its not like the team is pocketing the extra cash. They spend tons of money on scouting, drafting, and player development. I’ll gladly pay the prices if the team continues this trend of equal balance between short term and long term success without feeling like a puppy.

  • 3 Dave // Dec 23, 2009 at 11:14 pm

    Your first model is flawed, as your picture indicates that there are more than 40k seats available at Fenway Park, which you yourself said is simply not true. I think your difficulty is that you’re oversimplifying the problem by saying that all tickets are the same. While you can say that there is an average ticket sold at the game at any specific time, your model ignores the inter temporal value of the tickets. This problem is very similar to buying tickets on an airplane, which understandably sell for a higher price the day of the flight than they do months in advance. The only difference is that the government bans resale of airplane tickets whereas they do not for baseball tickets.

    The tickets that scalpers sell are (assuming they aren’t selling fake tickets) for better seats and are purchased well in advance. The tickets that are still on sale on game-day from the stadium are of much lower quality and likely up in the nose-bleed section or at least the second-deck. Scalpers make their money by betting that they’ll find people who want good seats but were not able to plan far enough ahead to buy the tickets at a lower price, much like airlines “take advantage” of people who are desperate to get out of town today versus a few weeks from now.

    Your initial model misses this, which is why the picture you show is not consistent with your story. I do agree that the Red Sox are cheapening their product and raising their prices. And I’d like to make a clarification to your story: Ticket sales are probably an insignificant part of their total revenue, which is why they are essentially loss leaders. Their real profits probably come from the sale of food and beverage and souvenirs within the park itself. I’m willing to bet that this is where the true profits come from, as in the long run fixed costs (ie, constuction and maintenance of the stadium) are largely if not entirely irrelevant and it’s the variable costs that truly drive profits.

  • 4 econgirl // Dec 25, 2009 at 8:02 pm

    @ Dave: I drew the supply of tickets in both models as fixed at 39.928, so I don’t understand how you are asserting that the pictures imply that there are more tickets than that available. Demand is not limited by the available supply, which is how shortages occur.

    While it is true that I used a representative price as an amalgam of all ticket prices (at least those of tickets sales directly through the park), drawing a separate market for each tier of tickets doesn’t really change the overall story.

  • 5 Dave // Dec 25, 2009 at 10:24 pm

    @ econgirl

    I looked at it again and reread what I wrote. My critique is poorly written, and I apologize for its lack of clarity. I was referring to the portion of the graph labeled “scalper opportunity” when I commented that it implies there being more tickets available.

    I would argue that the scalper’s opportunity is along the vertical axis instead. What your picture said, to me, was that the scalpers are able to introduce more tickets to the market somehow, which is untrue. They can, however, compete on price due to the inter temporal issue I raised before.

    I would also like to add that the tickets are likely selling for the market price, where supply meets demand. However, the consumers are presumably paying for the ticket with their money AND their time spent in line or some other non-monetary cost. Scalpers provide a service to the people they sell tickets to: they incur the non-monetary costs and sell the tickets for a higher price. This higher price reflects their fee for not having to deal with whatever the other costs of the tickets are.

    I’m unsure of how to submit pictures on here, but I whipped up a couple of quick graphs in MS Paint). I’ll post it on my blog (with a link to yours, of course) if you would like to look at it, here’s the link:

  • 6 AJP // Jan 4, 2010 at 12:18 pm

    The “scalper opportunity” is not refering to just that horizontal line, it’s the entire area under the demand curve and above the price. The graphs are correct.

    Also, airline tickets are usually cheaper as it gets closer to departure, and are more expensive months in advance. Airlines want to fill flights as close to capacity as possible as it is much more efficient than flying a bunch of half-filled aircraft.

    However, if you don’t schedule in advance, you risk not getting the flight time you desire or the number of seats you desire. Airlines know this, and therefore charge more.

  • 7 AJP // Jan 4, 2010 at 12:24 pm

    Actually, after looking at the graphs Dave posted (which I stupidly did after posting a comment), I think he might be correct.

    The scalper opportunity comes from selling to the people whose willingness-to-pay is above the current selling price, but doesn’t involve tickets that wouldn’t already exist – those tickets are part of the 39,928 supply, but are no longer selling for the “current price,” but a higher one.

    I think Dave is correct.

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