Economics of Social Issues Study Set 2

Business

Quiz 9 :

The Economics of Professional Sports: What Is the Real Score

Quiz 9 :

The Economics of Professional Sports: What Is the Real Score

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Explain the economic consequences that would unfold if one of the major four sports leagues reorganized into a single-entity league. Discuss the consequences for players and fans.
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If a major sports league such as the NFL or NBA decided to restructure itself into a single-entity league, they would try to manipulate things to maximize their profit at the expense of players and fans. The high salaries of its players would be diminished as a result of the team managers exercising more monopsonistic powers. They would no longer have access to free agencies, and revenue or performance based salaries would no longer be options. There would likely be more labor disputes and legal action regarding antitrust laws as well.
Because of the profit-maximizing nature of this practice, more money from the revenue would go towards to the managers, leaving fewer funds available for other practices such as broadcasting or merchandising that maintain open channels between the team and their fans.
Furthermore, the single-entity would likely be in competition with the world market, and its players might find themselves tempted by more lucrative offers from other countries. This would make it harder for the entity to retain a solid fan following in its home country.

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What is free agency? How has it eroded the monopsonistic power of professional sports teams?
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Monopolistic competition:
The monopolistic competition is a type of market structure, which is characterized by many firms enter in the market, no barriers to entry and exit of the firm, selling differentiated products, the firm has some control over the price.
Free agency:
According to the resources market, the free agency is a club that holds exclusive rights of the professional players, which allow all professional player to play with the clause of a contract for a specified number of years or declare any time.
Eroded the monopsonistic power of professional sports teams:
The free agency of the sports club has a clause that give baseball clubs monopsony power to hire the players. The free agency policy and contract distinguish market power. Hence, the reserve clause gave the monopsony power to the sports clubs to hire the players. Since the players of the team realize that agency paying less salaries than that could be obtained in a competitive market. Hence, all the players organized and fought the owners in the antitrust court. Therefore, based on the independent arbitrator overturn on the reserve clause, the player and owners reached a compromise, which is that any player can hold exclusive right to play in a club with the agreement for a specified number of years but also can declare from the agency when the highest bidder offer better service. Hence, with the new clause with player, the sports club loses the monopsonistic power of professional sports teams.

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Explain how professional sports leagues maximize joint profits through coordinated behavior in the product market. Will each team earn the same amount of profit under a cartel agreement as it would if market competition prevailed?
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Professional sports league
Professional sports league refers to group of professional sports teams that compete against each other in particular sport.
Cartel
Cartel is formed by two or more producers through formal agreement to protect its own interest. The objective of cartel is to maximize profit by regulating the market either by manipulating price or regulating supply.
Maximization of joint profit for sports league:
Since, professional sports leagues are considered as a cartel, which allow the professional sports teams to maximize joint profit by putting restrictions on output and increasing price. Professional sports leagues ensure the professional sports team to survive long enough through sharing joint profits generated through output
Professional sports leagues generate revenue through sale of ticket and concession, merchandising rights for team souvenirs and novelties, and radio and television broadcast rights. The league has specific rules for division of revenue generated through the sale of tickets between host team and visiting team. The league also regulates the business of merchandising products that carry team logos and trademarks. This helps in discouraging counterfeiters and allows league to promote merchandising products for the entire team and reduce interclub competition. And major source of revenue comes from selling of television broadcast rights. Professional sports leagues generate revenue by selling television broadcast rights of all games as "package deal" to the highest bidder.

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What is a cartel? What industry characteristics are necessary for the successful formation and operation of a cartel?
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Define what is known as monopsonistic profit. How is it different from normal profit? If an employer is earning monopsonistic profit, are workers being "underpaid"? Why or why not?
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Use economic analysis to explain why the average NBA player salary is greater than the total salaries of all players on an average MLS team.
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How does a single-entity sports league differ from the traditional structure of professional sports leagues in the United States? What is the consequence on player salaries of a single-entity league? Explain.
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Why does a cartel's marginal revenue curve lie below its demand curve? Explain with a numerical example and a graph.
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From an economic perspective, explain why some professional athletes choose to consume performance-enhancing drugs. What can professional sports leagues do to reduce the incidence of illicit substance use among players?
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From an economic perspective, are professional sports players worth their multimillion-dollar salaries? Explain.
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Use economic analysis to explain why labor disputes have become common in professional sports. In your opinion, which side has the advantage during collective bargaining-the owners or the players? Why?
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Professional baseball enjoys a special legal exemption in the United States. What is this exemption, and why does it exist? Does it apply to other sports leagues?
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Why do team owners rigorously regulate the number of teams in their league? Under what circumstances would team owners vote for an expansion in the number of teams? When would they vote for a reduction in the number of teams?
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Explain why professional sports teams must cooperate with one another in order to produce competitive games for fans.
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Discuss the economic pressures and incentives for professional sports teams to relocate. Are professional sports teams an important tool for a city's economic development? Explain why or why not.
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What is a salary cap and why is it an important issue during labor negotiations in professional sports?
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What is the difference between a strike and a lockout? Why are labor disputes so common in the professional sports industry?
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Why do taxpayers continue to support the public financing of new stadiums and arenas for professional sports teams? Are new stadiums and arenas good investments for a metropolitan area? Why or why not?
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For many years professional football players have earned on average less than half of what professional baseball players earned. Using economic reasoning, how can this fact be explained?
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What is a monopsony? What conditions give rise to a monopsony? How can professional sports teams be considered monopsonies?
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