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Sport and Public Policy
Social, Political, and Economic Perspectives
by Charles A. Santo and Gerard C.S. Mildner
280 Pages
Sports figures, events, and organizations affect our society in vast, varied, and sometimes unexpected ways. To gain a broad-based understanding of how sport interfaces with public policy issues, a variety of viewpoints must be considered. Sport and Public Policy: Social, Political, and Economic Perspectives is the only text that examines some of the most compelling policy issues affecting the sports world from an interdisciplinary perspective—including economics, history, urban planning, not-for-profit administration, public health communications, political science, and philosophy. With contributions from a wide range of scholarly disciplines, this contemporary resource enhances traditional conversation and gives readers a fresh outlook on economic and political issues in sport.
Sport and Public Policy presents a contemporary view of how to understand and analyze complex and controversial topics. It begins by examining issues related to professional sports—including the unique nature of American sports leagues, the decisions and conflicts involved in the organization of sports leagues and events, and labor strikes and conflicts. It then examines professional sports, cities, and public finance. Readers are drawn into thought-provoking discussion of issues such as the public investment in sports facilities and recent trends in stadium and arena construction. The book also presents an example of a unique model of not-for-profit community ownership in action, which readers can implement in their own cities.
Sport and Public Policy explores amateur sports by presenting a fresh perspective on the link between sports and society, the dwindling levels of African-American participation in baseball, and whether or not the National Collegiate Athletic Association’s actions align with its stated principles and values. It also challenges the reader to think globally through a discussion of how sports affect and are affected by international relations, how a changing world economy is affecting the Olympic games, Major League Baseball’s efforts at global expansion, and the effects of global consumer marketing efforts.
The chapters encourage readers to consider their role as participants in sports and use their great power to make individual choices that influence their communities. To enhance the learning experience, Sport and Public Policy offers the following:
An application and implementation section in select chapters helps readers understand how to apply the content in their own roles in the sport industry or society. The case studies added to most chapters illustrate how the information and research are being applied in the real world. Some of the hottest topics in the sports world are covered from a public policy perspective, giving readers a new angle from which to analyze issues now and in the future.
Sport and Public Policy is a timely resource that will be valued by many. Researchers will use it as a springboard for further study of how sport affects our society economically, socially, and politically. Practitioners and anyone else interested in the role of sport in America will find the book creates a critical new awareness of sport’s interface with public policy and the potentially far-reaching implicattions of their decisions.
Part I. The Structure of Professional Sports
Chapter 1.Cooperation Amidst Competition: The Nature of Sport Leagues
Nathaniel Sampson and Gerard C.S. Mildner
Why League Cooperation Is Necessary
Downside of Cooperation
Organized Baseball: Evolution of a Cartel
Antitrust Law Interpretations and Baseball
Antitrust and Other Leagues: Are All Sports Equal?
Effect of Public Policy on the Balance of Power
Future Trends
Conclusion
Chapter 2. Beyond the Major Leagues: Lessons from the Organization of International Sports
Gerard C.S. Mildner
Organization of Soccer, the World Sport
Women’s Soccer: The Trial of a Single-Entity League
Rugby: The Contest over Professionalism, Nations, and Clubs
Cricket: The Broadcaster’s Leagues
Lessons for American Sports
Future Trends
Conclusion
Chapter 3. Why Professional Athletes Make So Much Money
Zenon X. Zygmont
The NHL’s Missing Season
Wage Determination in Professional Sports
Free Agency
Evaluating Player Productivity
Is it Possible to Pay too Much?
Future TrendsConclusion
Part II. Professional Sports, Cities, and Public Finance
Chapter 4. Economic Impact of Sport Stadiums, Teams and Events
Charles A. Santo
Public Cost of Big-Time Sports
Economic Magnitude of Sports in Perspective
Promoting Sport Investment Through Economic Impact Analysis
Sources of Exaggeration in Economic Impact Analysis
Ex Post Facto Empirical Evaluations
Policy Implications on Predicted Economic Impacts
Conclusion
Chapter 5. Cities, Stadiums, and Subsidies: Why Cities Spend So Much on Sports
Charles A. Santo
Evolution of Major League Sport Facility Development
Political Economy of Sport Facility Development
Importance of Consumption Benefits
Future Trends
Conclusion
Chapter 6. Community Ownership of Professional Sport Teams and the Role of Social Entrepreneurship
Dorothy Norris-Tirrell and Susan Tomlinson Schmidt
Identifying Community Ownership Alternatives
Using the Nonprofit-Charitable Purpose Structure: The Memphis Redbirds Baseball
Foundation
Future Trends
Conclusion
Part III. Amateur Athletics, Participation, and Public Health
Chapter 7.Influences of Urban Form on Physical Activity
Jennifer Dill and Lynn Weigand
Importance and Decline of Physical Activity in the United States
How Urban Growth Has Made Us Less Active
Public Policies to Increase Physical Activity
Do These Strategies Work?
Future Trends
Conclusion
Chapter 8. MLB’s Mixed Messages: African American Participation in Baseball
David C. Ogden
Myth and Semiotics
Analyzing MLB’s Messages
Moving from Political Speech to Myth
Challenging Myth
Policy Implications for Myth Making
Future Trends
Conclusion
Chapter 9.Contradictions and Conflicts: Ethical Dilemmas Inherent in Big-Time College Sports
Richard Southall, Mark S. Nagel, John Amis,and Crystal Southall
College Sports Today
National Collegiate Athletic Association (NCAA)
Corporatization in College Sports
Institutional Logics
Case Study: 2006 NCAA Men’s Basketball Tournament Broadcasts
Future Trends
Conclusion
Chapter 10. Sport, Doping, and Public Policy
Bryan E. Denham
Mediated Doping Representations and the Formation of Public Policy
Sporting Competition and the Formation of Regulatory Bodies
Media Representations, Government Hearings, and Public Policy in the 21st Century
Future Trends
Conclusion
Part IV. Sports and Globalization
Chapter 11. Political Economy of the Olympic Games
Gregory Andranovich, Matthew J. Burbank, and Charles H. Heying
Globalization, the New Economy, and Political Economy
Political Economy and the Olympic Games
Los Angeles: The Market Matters Most
Atlanta: The State Matters Most
Mexico City: Civil Society Matters Most
Future Trends
Conclusion
Chapter 12. American Baseball and the Global Labor Market: Resistance and Hegemony in the Caribbean
Charles A. Santo
Globalization of American Professional Baseball
Shared History and Parallel Development of Caribbean Baseball
Dominican Dependency, Underdevelopment, and Exploitation
Cuban Nationalism and Resistance
Movement Along the Spectrum
Future Trends
Conclusion
Chapter 13. Expanding Global Consumer Market for American Sports: The World Baseball Classic
Mark S. Nagel, Matt T. Brown, Dan A. Rascher, and Chad D. McEvoy
Baseball’s Worldwide Development
The Consumption of MLB in the United States
The Creation of the World Baseball Classic
World Baseball Classic Revenue Sources
Future TrendsConclusion
Charles A. Santo, PhD, is assistant professor of city and regional planning at the University of Memphis in Tennessee. He also serves as coordinator of the Planning Innovations Technology Lab. In addition to having taught courses on sport and public policy, he has published many peer-reviewed articles on the relationship between sport, economic development, and urban public policy. He has been invited to share his research at regional, national, and international conferences. Dr. Santo is a member of the Urban Affairs Association. He earned a PhD in urban studies from PortlandStateUniversity.
Gerard C. S. Mildner, PhD, has been at PortlandStateUniversity since 1991. Currently he is associate professor of urban studies and planning and director of the Center for Real Estate. Dr. Mildner has written extensively about real estate and location within cities. He is the author of several book chapters, including one on baseball and basketball stadium ownership and franchise incentives to relocate. He is a member of the Urban Affairs Association. He earned his PhD in economics from New YorkUniversity.
Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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Economic impact of sport stadiums, teams, events
An exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events.
From the X-Games to the Olympic Games, from bush league ballparks to state-of-the-art major-league stadiums, governments spend large amounts of public money to lure sporting events or host teams. This chapter begins an exploration of public policy decisions regarding investment in sport by laying a foundation that focuses on the economic impacts of stadiums, teams, and events. This focus provides an essential grounding for the evaluation of public investment decisions that are often framed in the context of economic development policy. Building on that foundation, chapter 5 considers other reasons that officials and residents might support public investment in sport, and illustrates how such decisions are swayed by a mix of economic circumstances, political influence, and private power.
The contents of the current chapter will
- examine the role that professional sports play in a local economy;
- explain the process used to project the economic impacts of sport stadiums, teams, and events, and describe the main sources of error (or abuse) that lead to exaggerated projections of economic impacts; and
- review some empirical studies that cast doubt on the ability of stadiums, teams, and sporting events to serve as economic catalysts.
Public Cost of Big-Time Sports
The expenditure of public money on sport facilities and events is an international phenomenon that occurs at every level of government. The government of Portugal spent $732 million to host Euro 2004, the European soccer championship
tournament (Smale, 2004, June 2). Public money paid for the construction of seven new stadiums in a country about the size of the state of Indiana. Portugal's spending paled in comparison with the cost associated with the 2002 World Cup, cohosted by South Korea and Japan. To prepare for the event, various Japanese localities built 7 new stadiums and renovated 3 others at a cost of $4.5 billion. South Korea spent $2 billion on 10 new facilities (Struck, 2002).
Olympic spending dwarfs even these figures. The Greek government spent $12.8 billion to hold the 2004 Summer Olympics in Athens, and the Chinese government invested over $43 billion for the Beijing Games in 2008 (Gross, 2008). This type of spending is often speculative in nature; cities take on construction projects long before they are awarded host status. Public spending on the 2002 Salt Lake City Games began in 1990 when a portion of state and local sales tax revenue was diverted to fund construction of bobsled, luge, speed skating, and ski jump facilities. Salt Lake City was not awarded the 2002 Games until 1995 (Burbank et al., 2001). The Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1924), and Cleveland's Municipal Stadium (1931) were all built with public money in failed bids to host the Olympic Games. (Los Angeles did successfully attract the 1932 Games.) These facilities all eventually played host to professional baseball or football teams.
Recent spending on stadiums for top-level professional teams has generated a great deal of attention. Between 2000 and 2009, 31 major-league stadiums and arenas opened across urban America at a public cost of approximately $8 billion. A few were built to attract new teams, but most replaced existing facilities for incumbent teams. Cincinnati's Cynergy Field (formerly called Riverfront Stadium), former home of the NFL Bengals and MLB Reds, was replaced by two new stadiums built with over $600 million in subsidies from Hamilton County. Multiple facilities were also built to replace Three Rivers Stadium in Pittsburgh and Veterans Stadium in Philadelphia. The average cost of a football or baseball stadium built since 2000 is $528 million. The average cost of a basketball or hockey arena built during this period is $276 million. Public money has typically covered about two-thirds of these costs. (Chapter 5 provides a detailed assessment of recent stadium construction trends.)
Economic Magnitude of Sport in Perspective
The significant investment by local governments suggests that the economic returns of sport must be quite large. Indeed economic benefits are often proffered as the justification for sport subsidies. Teams, stadiums, and events are commonly promoted as economic catalysts. For example, in 1997 a group campaigning for a new publicly funded football stadium for the San Francisco 49ers used the slogan “Build the Stadium—Create the Jobs!” (Epstein, 1997). The Oregon Stadium Campaign, a group working to bring major-league baseball to Portland, ran an ad in the local newspaper that read, “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms.”
If you have read the previous chapters of this book, we hope that you are now convinced that talking about sport as big business is legitimate. Sport leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerates buy and sell teams for hundreds of millions of dollars. Unions struggle with owners for their share of revenue, and salaries climb increasingly higher, in part because of escalating television contracts. Big business indeed, but how big is big? By many indicators, sport teams as individual firms play only minor roles within complex urban economies.
Many professional sport teams have annual revenues that exceed $100 million. Average annual revenues are approximately $155 million in the NFL, $130 million in MLB, $95 million in the NBA, and $70 million in the NHL (Zimbalist, 2003). These numbers may seem large, but some comparisons can provide perspective. If you are enrolled in a state university, chances are that your school takes in more revenue and spends more than the closest professional sport team. For example, Portland State University has a budget of nearly $200 million, more than twice that of the Portland Trailblazers. For another comparison, consider this: In 2003 the average Costco wholesale store had annual sales of $113 million, exceeding the revenues of most sport teams (Heylar, 2003). Few would expect a big-box warehouse store to be a major player in an urban economy, yet they are typically bigger businesses than sport teams. Of course, the local warehouse store does not have devoted fans who wear Costco hats, paint their faces in Costco blue and red, and follow the successes and failures of the store on the nightly news. We will discuss those benefits (consumption benefits) in the next chapter, but for now let us focus on the role of sport teams in the local economy.
Another way to put the economic magnitude of sport teams in perspective is by examining the share of total payroll and employment that they represent within their local economies. We can use Portland as a case study to explore the current significance of the Trailblazers and the potential significance of adding a professional baseball team.
Table 4.1 shows total private-sector employment and payroll for Multnomah County and Portland's six-county primary metropolitan statistical area in 2001. The table also shows employment and payroll figures for the spectator sport industry, as defined by the North American Industry Classification System (NAICS). This industry category (NAICS 71121) includes all professional and semiprofessional sport teams; athletes involved in individual professional sports; and businesses associated with automobile, horse, and dog racing. For the Portland metropolitan area, the Trailblazers make up the bulk of this category, but it also includes payroll and employment related to a minor-league baseball team, Portland International Raceway, Portland Meadows horse-racing track, Multnomah Greyhound Park, and other small spectator sport ventures. Still, the industry accounts for less than 1 percent of Multnomah County's private sector payroll and only 0.2 percent of the county's jobs. At the metropolitan area level, the contributions of spectator sports are even more diminutive.
Table 4.1: Employment and Payroll in Portland's Spectator Sport Industry
| Employees | Payroll ($100,000s) | |||||
| Total | Spectator sports | Spectator sports as % of total | Total | Spectator sports | Spectator sports as % of total | |
| Multnomah County | 380,379 | 762 | 0.20% | 14,130,922 | 116,550 | 0.82% |
| Portland Metropolitan Area | 836,996 | 762 | 0.09% | 31,086,682 | 116,550 | 0.37% |
Using this approach, we can examine how things would look if the Oregon Stadium Campaign were successful in adding a major-league baseball team to Portland's sport landscape. Remember the newspaper ad “$150 million company seeks move to Oregon. Will bring jobs, development, snappy new uniforms”? For starters, the $150 million figure seems too high. According to figures furnished by Major League Baseball in 2001, average team revenue was $118 million. Forbes estimates average team revenues for 2003 to be about $130 million. Although a few teams have revenues that exceed $150 million, a team willing to relocate to Portland would likely be on the low end of the revenue spectrum (at or below $100 million).
Let us make the generous assumption that a Portland baseball team would have a payroll of about $80 million, near the league average. Again, the teams most likely to move are low-payroll franchises. For example, in 2004 the Oregon Stadium Campaign worked diligently to lure the Montreal Expos, whose payroll at the time was $44 million. The opening day 2009 payroll of the Florida Marlins was approximately $36 million. As shown in table 4.2, a firm with an $80 million payroll would account for about 0.5 percent of Multnomah County's payroll and 0.25 percent of the metropolitan area payroll. Table 4.2 also revises table 4.1 by adding this $80 million to the overall payroll figure for the spectator sport industry. Even with the addition of a baseball team, the spectator sport industry would account for just slightly more than 1 percent of the county's total private sector payroll and less than 1 percent at the metropolitan area level. (For the record, we do not doubt the part about the snappy new uniforms!)
Table 4.2: Portland's Spectator Sport Industry With an MLB Team
| Payroll ($100,000s) | |||
| Total | New MLB team | MLB team as % of total | |
| Multnomah County | 14,210,922 | 80,000 | 0.56% |
| Portland Metropolitan Area | 31,166,682 | 80,000 | 0.26% |
| Payroll ($100,000s) | |||
| Total | Revised spectator sports | Revised spectator sports as % of total | |
| Multnomah County | 14,210,922 | 196,550 | 1.38% |
| Portland Metropolitan Area | 31,166,682 | 196,550 | 0.63% |
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Political economy and the Olympic Games
The Olympics have since their inception been closely associated with an ideology of social and technical progress.
Are the Olympics Games merely a sporting event, or do the Games carry additional economic, cultural, political, and spatial import? The Olympics have since their inception been closely associated with an ideology of social and technical progress. In particular, these international sporting competitions have been used as a tool for expressing national goals and political agendas (Espy, 1979; Hill, 1996; Lenskyj, 2000). In addition, the economic value of the Olympics has increased dramatically over time, largely because of the telecommunications revolution and the increased amounts paid for national and international broadcast rights (Barney, Wenn, and Martyn, 2002; Larson and Park, 1993). Table 11.1 shows the increased revenues from television broadcast rights from 1960 to the 2008 Summer Games. With these increased revenues came greater commercialization of the Games (Magdalinski, Schimmel, and Chandler, 2005; Tomlinson, 2005), and with greater resources and the need to control their brand, the International Olympic Committee adapted as a transnational organization (Guttmann, 1994; Houlihan, 2005). Cities, too, began to respond to the greater prominence of the Olympics, and the competition to host the Games intensified (Andranovich, Burbank, and Heying, 2001; Shoval, 2002). In turn, the increased visibility of the Olympics and its close association with product marketing meant that various movements, both social and sport-related, have been co-opted into the Olympic family or have become a source of resistance (Burbank, Heying, and Andranovich, 2000; Kidd, 2005; Lenskyj, 2000; Schaffer and Smith, 2000).
| Olympic Games | Host city | Broadcast revenue, US$ (millions) |
| 1960 | Rome | 1.2 |
| 1964 | Tokyo | 1.6 |
| 1968 | Mexico City | 9.8 |
| 1972 | Munich | 17.8 |
| 1976 | Montreal | 34.9 |
| 1980 | Moscow | 88.0 |
| 1984 | Los Angeles | 287.0 |
| 1988 | Seoul | 402.6 |
| 1992 | Barcelona | 636.0 |
| 1996 | Atlanta | 898.2 |
| 2000 | Sydney | 1,331.5 |
| 2004 | Athens | 1,496.0 |
| 2008 | Beijing | 1,737.0 |
Among assessments of the political economy of the Olympic Games, one topic that deserves particular scrutiny is the economic impact of the Games on their host cities. Kasimati (2003), for example, examined studies of the economic impact of hosting the Olympics and found that before the 1984 Games, no impact studies had been conducted. Since then, a variety of cities have conducted impact analyses during the bidding phase and after the Games ended. Kasimati concluded that the rosy picture painted by studies produced during the bidding phase was “not confirmed by ex-post analyses and this therefore prompts the need for improved theory” (Kasimati, 2003, p. 442). Preuss (2000, 2002), who has conducted extensive analysis of the economics of the Games, suggested that since the 1980s, two things can almost be guaranteed about hosting the Games: First, the local organizing committees can be almost certain that there will be a financial surplus after the Games, largely because of the IOC's negotiation of international sponsorship and television contracts. Second, the Games have expanded to the point where huge sport facilities and new infrastructure for athletes, tourists, and the media are required. This gigantism is evidenced in the number of ticket sales and the fact that media representatives outnumber athletes at the Olympic Games (Preuss, 2002, p. 15). The size of the Olympics also increases the opportunity that cities have to use the Games as a basis for wide-scale redevelopment as Barcelona did for the 1992 Games and as Beijing did for the 2008 Games (Broudehoux, 2007; Essex and Chalkley, 1998). Such extensive redevelopment of cities, however, raises the question of whose interests are being served by the redevelopment because the new sport infrastructure is often at odds with the needs of residents.
The growth of the Olympics has resulted in another challenge for policy makers: the opportunity costs of hosting the Games. Essex and Chalkley (2003) identify crucial questions that local policy makers need to address: (1) Are local funds being diverted from service and education needs to support Olympic infra-structure? (2) Are local taxes being increased to pay for the new infrastructure? (3) Will the Olympics displace poor people or disrupt their neighborhoods? (4) If the costs of staging the Games continues to grow, will cities in developing nations ever be able to host the Games? Essex and Chalkley (2003, p. 14) noted that the IOC's Olympic Games Study Commission examined the issue of gigantism and concluded that it was time to manage the growth of the Games to preserve their attractiveness. All of this is part of the broader context for understanding the political economy of the Olympics.
Cities pursue the Olympic Games for three important reasons: tourism, image, and regeneration (Heying, Burbank, and Andranovich, 2007). The rise of tourism, and the response to it by nations, is a clear indication that the international economy has changed. The pursuit of leisure, both for its own reward and as part of business travel, is a growth sector of the new economy, and the development of an “infrastructure of play” is often the result (Judd, 2003). In 2005, for example, the Travel Industry Association of America (2006) reported that domestic and international travel added $650 billion to the U.S. economy, generating 8 million jobs, $171 billion in payroll income, and $105 billion in federal, state, and local tax revenues. It is no wonder that cities, states, and the federal government encourage tourism development. At the city level, policy makers attempt to attract travelers through the branding of places and by focusing regeneration strategies to attract investment funds and human capital (Smith, 2007).
Although discussion of the Olympics is often couched solely in terms of potential economic benefit, any analysis of the political economy of the Olympic Games, we argue, needs to be situated in the context of the broader issues of the politics and cultural imagination, as well as the economics, of these events. The Olympic Games are not just another one-off event; the bid period, the organizing period for the host city, and the open-ended legacy period following the Closing Ceremonies provide cities with a decade-long planning period and an infinite legacy horizon that can be oriented toward the values of the Olympic Games. The Olympics are a critical opportunity either for development or for exploitation, and the choice is made in policy decisions. Next, we briefly present three cities' host experiences to illustrate the political economy of the Olympics, characterizing each city according to the three modes of allocating resources: the market, the state, and civil society. Each mode illustrates different pressures and contextual influences, and we believe that this exercise demonstrates the importance of using political economy as an analytical frame and not just accepting the idea of hosting the Games as an inevitable, or even a desirable, policy outcome.
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League cooperation necessary for fair play
A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
From the beginning, competitors in organized sports have cooperated with one another to ensure order and provide a marketable product. A natural outgrowth of associations between individual franchises, leagues have enhanced the viability and stability of their professional sports by providing structure and ensuring an even field for competition.
Setting Rules and Schedules
The early years of British soccer and American college football were often played under “house rules” determined by the host team, which sometimes led to chaotic disputes and violent outcomes. Concerned by some of the extreme events, college presidents unified the rules of college football and instituted a number of measures to ensure the safety of players. The colleges hired impartial third-party referees to allow each team to participate under conditions of fair play.
As professional sports developed, league organizations established common rules of play so that fans could understand the game and teams could prepare for the next game without worrying that the rules would be tailored to help the home team.
A second reason for sport leagues to organize is the need to arrange a schedule among participating teams. Unlike other fields of commerce, each sport team needs to meet its rivals, so some coordinating authority must arrange a schedule of games. Moreover, fans find interest in the determination of the best team in that sport through a league table or league championship. For such a champion to be determined in a fair way, each participating team should play the other teams in their league in an equal or near equal number of circumstances.
Competitive Balance
Sport fans draw interest from seeing sporting events in which the outcome is uncertain and the strength of each team is more or less balanced. In practice, the intervention required for a league to ensure that the teams within the league have a competitive balance is extensive. For most of the 20th century, however, sport leagues did not make a great effort to ensure competitive balance. Dynasties thus emerged, such as the New York Yankees in baseball (winners of 6 American League titles between 1921 and 1928 and 8 World Series titles between 1947 and 1958) and the Boston Celtics in basketball (winners of 10 NBA championships between 1959 and 1969).
One can argue that competitive balance within a league is not necessary to draw fan interest to a sport, as evidenced by the attendance figures in baseball and basketball during the era of the Yankees' and Celtics' dominance. Dynasties create familiar players and story lines for fans to follow. More recently, the emergence of fantasy sport leagues has allowed fans to follow a game focused on the statistical performance of players whom they “own” rather than the outcome of the game itself.
Nevertheless, a number of innovations to improve league competitive balance have been created in recent decades. For example, consider the following:
- Order of the draft. One of the first innovations was the creation of the reverse-order-of-finish player draft, which allows the previous year's worst team to have the first choice among new players entering the league. To some extent, this system promotes equality of teams over time.
- Unequal schedules. The National Football League (NFL) has implemented a policy of unequal schedules (challenging one of the foundations for league organization described earlier) to create greater uncertainty in league outcomes. Schedules are drawn so that the division-winning teams of the previous year play other division winners more often, and last-place teams play each other more often as well. This policy enhances the likelihood that weaker teams will have better win-loss records and helps the league schedule a greater number of compelling matchups than would be generated by a random schedule.
- Revenue sharing. Dominance and dynasties emerge in part because teams in larger cities have access to more revenue than do teams in smaller cities; they can sell more tickets at higher prices and charge higher prices to television networks that want to broadcast their games. To mitigate this potential imbalance, some leagues have established procedures to redistribute revenue from rich teams to poor teams or to provide equal shares of revenue that is generated at a leaguewide level. For example, current league agreements in Major League Baseball require that each team contribute 31 percent of its local revenue (which includes revenue from broadcast contracts and ticket sales) to a common pool that is then redistributed evenly to all teams in the league. The largest source of revenue for NFL teams is television broadcast rights. In the NFL, contracts for broadcast rights are negotiated directly between the league as whole and national networks, rather than between individual teams and their local networks. This policy allows the league to distribute the revenue evenly to all teams regardless of their market size.
- Salary caps. Several leagues also implement salary caps, which limit the amount of money that each team can spend on player payroll, to ensure that teams in larger markets (or with wealthier owners) cannot simply buy up all the best talent by outspending smaller-market teams. Luxury taxes, which are levied as a financial penalty on teams with payrolls above a certain threshold, are designed to serve a similar purpose.
Many critics of professional sport leagues view their obsession with competitive balance in recent years as more of an attempt to increase firm profitability by gaining an economic advantage over players in labor negotiations or by gaining advantage over broadcasting companies in the market for broadcasting rights. In addition, revenue-sharing agreements can often create perverse incentives for teams to lose. A team owner with a low payroll often stands to gain more in profit from revenue-sharing redistribution than he or she might by making the kind of payroll increases necessary to field a winning team.
Downside of Cooperation
At some level, leagues play a benign and beneficial role as a convener of events and guarantor of fair play. Although we accept that the home team has the advantage of its partisan crowd and its familiarity with the home stadium, no one would accept today having the home team hire the referees, pick which ball should be used, or establish the penalties for fouls. But sport leagues also present a troubling set of contradictions. Although leagues allow owners to work together to promote fair play and balanced competition between member teams, they simultaneously allow competing business people to collude with one another to gain control over individual players, squash any competition that might emerge from rival leagues, and exert influence over fans and city finances through market power. Such collusion among entities who are otherwise competitors is a hallmark characteristic of a cartel. Therefore, sport leagues also represent a contradiction in American public policy because their monopolistic operations are aberrations in the face of antitrust law. This contradiction has been enabled by a series of judicial and congressional precedents, which are summarized in table 1.1 and are discussed in detail throughout the remainder of this chapter.
| Court case or congressional action | Year | Issues involved | Impetus | Outcome or effect |
| Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs | 1922 | Alleged antitrust activities of Organized Baseball | The Baltimore franchise of the Federal League sued the American and National Leagues when the Federal League failed, leaving Baltimore without a professional team. | The Supreme Court ruled that Organized Baseball did not qualify as an illegal monopoly, declaring that baseball was inherently neither interstate nor commerce. Baseball seemed to have been given an exemption from antitrust law. |
| Congressional Subcommittee on the Study of Monopoly Power Hearings | 1951 | Alleged antitrust activities of Major League Baseball | Congress considered granting a blanket exemption to Major League Baseball to protect it from pending antitrust lawsuits. | Not willing to support the “baseball monopoly,” Congress refused to take any action, leaving it to the courts to decide the legality of baseball's actions. Congress' inaction, however, was seen as an endorsement of baseball's antitrust exemption. |
| Toolson v. New York Yankees | 1953 | Baseball's reserve clause and antitrust activities | A player in the New York Yankees franchise opposed a demotion and sued the team and the league, charging that their monopolistic practices were an illegal restraint of trade. | The Supreme Court reaffirmed baseball's antitrust exemption, citing the exemption given the sport in the Federal case and Congress' inaction in 1951. |
| United States v. International Boxing Club of New York | 1955 | Alleged antitrust activities of a professional boxing club | The federal government charged the International Boxing club of New York with being an illegal monopoly on the grounds that it controlled boxing exhibitions and broadcasts in various states. | The Supreme Court ruled the International Boxing Club an illegal monopoly and declared that baseball's antitrust exemption did not apply to other sports. |
| Radovich v. National Football League | 1957 | Football's reserve clause and alleged antitrust activities | William Radovich, a former NFL player, sued the league when he was blacklisted after leaving the NFL to play for a team in a rival league. | The Supreme Court declared the NFL's reserve clause illegal under antitrust laws. Baseball's exemption did not apply to other sports leagues. |
| Sports Broadcasting Act | 1961 | Congressional protection for sports' leagues controls over broadcasting | Sports leagues sought special protection from antitrust laws so that they could negotiate broadcast contracts for their member teams. | Congress began setting parameters on acceptable monopolistic activities, proving willing to grant exemptions for favorable reasons. |
| NFL-AFL Merger | 1966 | Congressional protection for football leagues to merge and set up a football cartel | The National Football League and American Football League sought approval to merge into one league, eliminating competition in professional football. | Congress approved the merger, largely because of popular interest for a unified league championship (the Super Bowl). Congress, however, later rejected a proposed merger between the National Basketball Association and the American Basketball Association in 1971. |
| Mackey v. National Football League | 1976 | The legality of the “Rozelle Rule,” a football policy designed to restrict free agency | A policy requiring a team to give up players if it signs a free agent from another team was challenged as an illegal restraint on trade. | A district court ruled the “Rozelle Rule” illegal, supporting free agency in football and other professional sports. Courts proved willing to support players' challenges to sport cartels' powers. |
| Smith v. Pro Football | 1976 | The legality of football's player draft | The college player draft was challenged as an illegal restraint on trade. | A district court ruled the draft system an illegal limitation on an athlete's opportunities and salaries, but the draft was preserved as part of a collective bargaining agreement. |
| L.A. Memorial Coliseum v. National Football League | 1984 | The right of an owner to move his franchise | Unhappy with his stadium deal, Oakland Raiders owner Al Davis sued the NFL for the right to move his franchise to Los Angeles. | A district court ruled it illegal for a sports league to prevent one of its member owners from moving his franchise, asserting some power for owners and paving the way for franchises to move freely at their owners' desires. |
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Wage determination in professional sports
In a perfectly competitive market, in which athletes’ wages are equal to their marginal revenue products, only two factors can explain increasing player salaries.
A labor market occurs when sellers of labor interact with buyers of labor. People in the workforce sell labor services to prospective employers in return for a payment. In a competitive labor market, buyers and sellers are numerous. Consider the labor market for accountants. In most cities, many firms employ accountants and many people are trained to work as accountants. A firm will hire an accountant only if the wage that it has to pay the accountant is exceeded by the value generated by the accountant. That value is known as the marginal revenue product (MRP), the value that an employee produces after all other input costs are taken into consideration. For example, suppose Andrea produces $1,500 in accounting services each week for her employer, firm A, and the cost of the inputs that she needs to do her job (e.g., a computer and an office) is $300 per week. Under these circumstances, firm A should be willing to pay her up to $1,200 every week. It would prefer to pay her less, of course, but it must take into consideration the other accounting firms that are competing for Andrea's services. If firm B offers Andrea a higher wage than she currently receives, she may switch jobs. Similarly, although Andrea prefers to earn the highest possible wage, she realizes that many other trained accountants are in the market. If other equally skilled accountants are willing to work for less than Andrea's MRP of $1,200, she may find herself unemployed if she insists on a wage of $1,200. The competition on both sides of the market is what determines the prevailing wage or salary and the number of people employed.
MRP is defined as the product of marginal product and marginal revenue (MRP = MP × MR).MP is a measure of how productive a worker is in terms of output, and MR is a measure of the additional revenue generated by each new unit of output. For a bakery, MP might be measured as the number of additional cakes produced when an additional baker is hired. MR reflects the additional revenue created when an extra cake is sold. The new baker's value to the bakery is equal to the number of cakes he contributes multiplied by the revenue created by each new cake.
An athlete's value, or MRP, can be thought of as the number of wins that he generates for his team multiplied by the value of each victory.
In a perfectly competitive market, in which athletes' wages are equal to their marginal revenue products, only two factors can explain increasing player salaries: (1) an increase in marginal product or (2) an increase in marginal revenue. The first factor is straightforward; a player who improves and contributes more to the team receives a higher wage when the time comes to renew his contract. The second factor reflects demand, and it is driven by willingness to pay—the willingness of fans to pay for tickets, of networks to pay for broadcasting rights, and of advertisers to pay for slots during those broadcasts. To a large extent, athletes' salaries are high because willingness to pay is high. In other words, fan interest in professional sports causes salaries to be large.
In professional sports, athletes tend to be paid according to their MRP. But several key factors distinguish the labor market for accountants or bakers from the market for athletes. First, athletes create enormous MRP for their employers. The New York Yankees pay third baseman Alex Rodriguez over $20 million each year because he generates at least that amount in ticket sales, television broadcasting rights, and other revenues. It is doubtful that any accountant can produce an MRP of a similar magnitude.
Second, there are far fewer athletes than accountants. The scarcity of athletes compared with accountants is another reason why salaries for the former exceed those of the latter. Simply put, many more men and women are qualified to be accountants than professional athletes. As an example, what percentage of the nation's population is tall enough to play in the NBA?
Third, the labor market for athletes is not perfectly competitive; rather, it has characteristics of a bilateral monopoly. A bilateral monopoly consists of a single buyer (a monopsonist) and a single seller (a monopolist). Although the sport labor market is made up of many teams and many players, teams organize into a singleleague, which exercises monoposonistic power, and players organize into a singlelabor union, which exercises monopolistic power. Labor (players' unions) and management (league officials) meet every few years to negotiate a new CBA; these negotiations can become contentious, and strikes and lockouts often result from an inability to reach a mutual agreement on the terms and conditions of the CBA. In some respects these negotiations are like the periodic bargaining that goes on between a teachers' union and the school district, between city hall and the firefighters' association, or between the autoworkers and the car companies. The group that has greater bargaining power tends to get their desired result. The same applies to a great extent in professional sports. The bargaining process is a battle in which players try to pull wages up to levels at or above their MRPs, and team owners try to push wages below MRP.
Fourth, unlike teachers, firefighters, or autoworkers, athletes' salaries are only partly determined through negotiation of the CBA between the league and the union. With some exceptions (noted later), the player unions do not establish pay scales or bargain for specific wages for individuals. Rather, the unions establish guidelines that allow each player to bargain for a salary approximating his MRP (later we will see that the crux of the bargaining process is an accurate evaluation of productivity). Economists are generally skeptical of any distortions in the market, including monopolization. Professional sports provide an interesting exception. The introduction of a players union in a market dominated by a single buyer tends to result in players earning something closer to a competitive salary. As described in the next section, before the introduction of unions, players were at the mercy of team owners and earned far below their productivity.
Fifth, price controls are present in the labor market for athletes. Rookies are typically paid a minimum salary. In 2007 a first-year MLB player earned $380,000 and a rookie NBA player made $427,163. CBAs commonly include a pay scale for the years before free agency, but some leagues extend the pay scale even farther; for example, an NBA player with at least 10 years' experience earned a minimum of $1,262,275 during the 2006-2007 season. The NBA and the NHL also have maximum salaries. If salary determination is beginning to sound complicated, it is. The best way to learn about specific salary policies and the myriad loopholes that exist is to read the specific CBAs for each sport (these are available online) and books like Edge's (2004) or Yost's (2006). But let us not lose sight of the main issue: Players want to be paid their MRP.
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