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Playing off the States delivers a grand prix

This weekend the Melbourne Grand Prix is finally upon us. Amid all the hoopla and fanfare it is perhaps easy to forget that this year Adelaide is without it. All the tourists that flocked there over the last decade have gone East. Much of the infrastructure built to accommodate them will lie idle. But this is only the tip of the iceberg. The true costs of the Melbourne Grand Prix run much deeper. While competition for such an event brings winners and losers and while it is clear that Adelaide is a loser, can we say that Melbourne is really the winner? When Adelaide was the only player, it could negotiate individually with the Bernie Ecclestone's Formula One Construction Authority. The lack of any rival put it in a good bargaining position. In the economics of competitive bidding, however, one plus one equal a big two. For the entry of another bidder, no matter how secretive that bidder is, throws all the power in negotiations over to the other side. By just threatening to play off the two rivals for the Grand Prix, its promoters could ensure that the monetary compensation for the event was as high as possible. How high? As high as Adelaide would have been willing to pay for it. For in an auction, to win you have to bid as high as the party who is second best. Interstate rivalry for major events raises the price paid for those events. Nonetheless, on the face of it, the event still goes to the city or state that values it the most. But does it get the event it really wants? The interests of the people of Melbourne and the Grand Prix promoters are not likely to be identical on this matter. While the promoters will be concerned with television royalties and ticket sales, residents will be concerned about tourism potential and environmental harm. Already, there has been substantial evidence of such conflicts over the location of the Grand Prix. Similar concerns have arisen regarding over major projects (e.g., the Fox Studios themselves a subject of interstate rivalry). Just as competition between the states means that the promoter gets the highest possible compensation for the event, it also means it gets the type of event it wants. The bidding war ensures that the most competitive city wins. And this city is the one whose politicians are most willing to bear the costs of being competitive. In the Grand Prix case, this means the city most willing to accept environmental harm and other issues (e.g., timing and

location) that might negatively influence tourism. It is even possible that the distortions caused by competitive bidding mean that the most socially valuable Grand Prix is not held in the right city. So with lost tourism and infrastructure, high monetary compensation and concessions over the nature of major events lies the legacy of interstate competition. While competition between firms benefits consumers, competition between the states only benefits an overseas promoter (and a monopsonist one at that). In this era of deregulation, the regulation of competition might not be fashionable. But in the arena of interstate rivalry, such moves would remove a very unhealthy aspect of the competitive environment. Joshua Gans Lecturer in the School of Economics University of New South Wales This article was originally published in the Australian Financial Review, 7th March, 1996, p.17. For more on grand prix competition see "Of Grand Prix and Circuses," Australian Economic Review, No.115, 3rd Quarter 1996, pp.299-307 (Download postscript version); and "Competing for Public Goods and Private Business," Working Paper, No.5, Melbourne Business School, 1996 (Download postscript version). A reaction to my research was reported by Paul Chamberlin, "Call for united front on events," The Age, 18th October, 1996, p.A5.