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For Daniel, Melanie, Dan, Tom, and Eric, who make
everyday a treasure.
 Brief Contents

Preface xvii

Part 1 Introduction and Review of Economic

Concepts 1
Chapter 1 Economics and Sports 3
Chapter 2 Review of the Economist’s Arsenal 13

Part 2 The Industrial Organization of Sports 61

Chapter 3 Sports Franchises as Profit-Maximizing Firms 63
Chapter 4 Monopoly and Antitrust 111
Chapter 5 Competitive Balance 151

Part 3 Public Finance and Sports 181

Chapter 6 The Public Finance of Sports: Who Benefits
and How? 183
Chapter 7 The Public Finance of Sports: Who Pays
and Why? 219

Part 4 The Labor Economics of Sports 249

Chapter 8 An Introduction to Labor Markets in Professional
Sports 251
Chapter 9 Labor Market Imperfections 289
Chapter 10 Discrimination 323

Part 5 Sports in the Not-for-Profit Sector 357

Chapter 11 The Economics of Amateurism and College
Sports 359

Works Cited 399

Photo Credits 423
Index 425

viii
 Contents

Preface xvii

Part 1 Introduction and Review of Economic

Concepts 1

Chapter 1 Economics and Sports 3

Introduction 3
1.1 The Organization of the Text 4
Special Features and Additional Resources 5
1.2 Babe Ruth and Comparative Advantage 6
Opportunity Costs 6
Absolute and Comparative Advantage 7
■■ Biographical Sketch: Babe Didrikson Zaharias 9
Summary 11 • Discussion Questions 11
• Problems 12

Chapter 2 Review of the Economist’s Arsenal 13

Introduction 13
Learning Objectives 13
2.1 The Supply and Demand Model 14
Demand, Supply, and Equilibrium 14
Changes in Supply and Demand 17
2.2 Producing Output and the Production Function 27
A Note on the Definition of Output 27
The Production Function 27
Price Ceilings and the Economics of Scalping 30
2.3 Market Structures: From Perfect Competition to
Monopoly 32
Perfect Competition 32
Monopoly and Other Imperfectly Competitive Market
Structures 34
The Impact of an Increase in Costs 37
2.4 The Rise of Professional Sports 39
■■ Biographical Sketch: Silvio Berlusconi 41
Summary 43 • Discussion Questions 44
• Problems 44

ix
x Contents

Appendix 2A Utility Functions, Indifference Curves,

and Budget Constraints 45
2A.1 Constrained Maximization 45
2A.2 Using Indifference Curves and Budget Constraints:
The Rise of Soccer and Baseball 52

Appendix 2B Regression Analysis in Brief 54

Multiple Regression and Dummy Variables 59

Part 2 The Industrial Organization of Sports 61

Chapter 3 Sports Franchises as Profit-Maximizing

Firms 63
Introduction 63
Learning Objectives 64
3.1 Maximizing Profits or Maximizing Wins? 65
Maximizing Profit 66
Maximizing Wins 67
3.2 A Closer Look at Revenues, and Costs 68
A Detailed Look at Revenue 71
The Distributional Effects of Revenue Sharing 82
Cost 84
Opportunity Cost and Team Movement 85
3.3 Taxes, Profit, and Owner Behavior 86
Finding Profit in Losses 86
Operating Income, Taxes, and Profit 88
Vertical Integration 88
3.4 The Importance of Leagues 90
The Origin of Leagues in American Sports 91
Setting the Rules 92
Limiting Entry 94
Limited Entry as Cooperative Behavior 98
Advertising 98
■■ Sports and the Law: The Limits of Leagues 101
3.5 Soccer’s Alternative Business Model 102
Profit-Maximization in Soccer 103
The Impact of Promotion and Relegation 104
The Financial Dangers of an Open System 106
The Single-Entity Ownership Model 106
 Contents xi

■■ Biographical Sketch: Bill Veeck 107

Summary 108 • Discussion Questions 109
• Problems 109

Chapter 4 Monopoly and Antitrust 111

Introduction 111
Learning Objectives 112
4.1 What’s Wrong with Monopoly? 112
Monopolists and Deadweight Loss 112
Do Monopolies Always Charge Monopoly Prices? 115
Promotion, Relegation, and Monopoly Power 116
4.2 Strategic Pricing and Price Discrimination 117
Variable and Dynamic Ticket Pricing 117
Bundling 120
Price Discrimination and Two-part Pricing 121
Monopoly Stood on Its Head: A Brief Introduction
to Monopsony 124
4.3 What’s Right with Monopoly? 125
4.4 Barriers to Entry that Leagues Create 127
■■ Sports and the Law: Franchise Location 128
4.5 S ociety’s Response to Monopoly and Monopsony:
Antitrust Laws 129
An Important Anomaly: Baseball’s Antitrust Exemption 130
Leagues That Lack an Antitrust Exemption 134
Limited Exemptions: The NFL and Television 135
4.6 The NCAA: An Incidental Cartel 136
4.7 Prisoner’s Dilemma: How Rational Actions Lead to Irrational
Outcomes 139
■■ Biographical Sketch: Alvin “Pete” Rozelle 142
Summary 144 • Discussion Questions 145
• Problems 145

Appendix 4A Overview of Basic Game Theory 146

An Alternative Application of Game Theory 147

Chapter 5 Competitive Balance 151

Introduction 151
Learning Objectives 152
5.1 Why Fans and Owners Want Competitive Balance 152
The Fans’ Perspective 152
xii Contents

The Owners’ Perspective 153

The Effect of Market Size 154
The Influence of Diminishing Returns 156
A Brief History of Competitive Balance 157
5.2 Measuring Competitive Balance 158
Within-Season Variation 158
Between-Season Variation 162
Illustrating Competitive Imbalance 164
5.3 Attempts to Alter Competitive Balance 167
The Invariance Principle 167
Revenue Sharing 169
Salary Caps and Luxury Taxes 171
The Reverse-Order Entry Draft 173
Schedule Adjustments in the NFL 176
Promotion and Relegation 176
■■ Biographical Sketch: Bud Selig 177
Summary 178 • Discussion Questions 179
• Problems 179

Part 3 Public Finance and Sports 181

Chapter 6 The Public Finance of Sports:
Who Benefits and How? 183
Introduction 183
Learning Objectives 184
6.1 How Teams Benefit from New Facilities 184
Facilities, Attendance, and Profits 185
6.2 How Fans Benefit from a New Facility 187
The Size and Shape of Baseball and Football
Stadiums 188
The Size and Shape of Basketball and Hockey Arenas 194
Do New Facilities Create Better Teams? 196
Teams as Public Goods 197
6.3 How Cities Benefit from Teams, Facilities, and Events 199
Positive and Negative Externalities 200
Facilities, Spending, and Tax Revenue 203
Location, Location, Location 211
The Impact of Special Events 212
 Contents xiii

■■ Biographical Sketch: Al Davis 215

Summary 217 • Discussion Questions 217
• Problems 217

Chapter 7 The Public Finance of Sports: Who Pays

and Why? 219
Introduction 220
Learning Objectives 220
7.1 How Cities Came to Fund Stadiums 220
Teams on the Move 221
The Three Eras of Stadium Construction 222
■■ Sports and the Law: Who Can Move? 223
7.2 How Teams Exploit Monopoly Power 224
Leagues, Cities, and Market Power 225
The Winner’s Curse 229
7.3 Stadium Location and Costs 230
How Exchange Rates Affect Costs 231
Why Most Stadiums Are Not in the Center of Town 232
7.4 Stadium Costs and Financing 234
7.5 Paying for Stadiums 237
Who Pays a Sales Tax? 240
Incremental Financing 242
Taxes That Spread the Burden 243
The Benefits of Debt 243
■■ Biographical Sketch: Williard “Mitt” Romney 246
Summary 247 • Discussion Questions 248
• Problems 248

Part 4 The Labor Economics of Sports 249

Chapter 8 An Introduction to Labor Markets

in Professional Sports 251
Introduction 251
Learning Objectives 253
8.1 An Overview of Labor Supply and Labor Demand 253
Labor Supply 254
Labor Demand 256
Labor Market Equilibrium 261
8.2 The Economics of Tournaments and Superstars 265
xiv Contents

8.3 T
 ournaments, Cheating, and the Distribution of
Income 269
More Potential Pitfalls of High Rewards: The Case
of NASCAR 270
Too Much of a Good Thing 272
Performance-Enhancing Drugs 273
The Distribution of Income 277
■■ Biographical Sketch: Scott Boras 278
Summary 280 • Discussion Questions 280
• Problems 281

Appendix 8A The Labor–Leisure Choice Model

of Indifference Curves 282
The Labor–Leisure Model When Hours Are Fixed 286

Chapter 9 Labor Market Imperfections 289

Introduction 289
Learning Objectives 290
9.1 The Monopsony Power of Sports Leagues 290
The Economics of Monopsony 290
The Reserve Clause 292
9.2 Unions in Professional Sports 293
A Brief Introduction to the Economics
of Unions 294
■■ Sports and the Law: McNeil v. The National Football
League 299
Salary Arbitration 302
Measuring Monopsony Power 303
Salary Caps 304
Luxury or Competitive Balance Taxes 308
The Impact of Rival Leagues 309
9.3 Labor Conflict and Compromise in Collective
Bargaining 311
Comparing the 2011 NBA and NFL
Negotiations 315
Professional Tennis Associations 318
■■ Biographical Sketch: Marvin Miller 320
Summary 321 • Discussion Questions 322
• Problems 322
 Contents xv

Chapter 10 Discrimination 323

Introduction 323
Learning Objectives 324
10.1 Becker’s Theory of Labor Discrimination 326
10.2 Different Forms of Discrimination in Professional
Sports 327
Employer Discrimination 327
Does Anyone Win with Employer Discrimination? 332
Employee Discrimination 337
Consumer Discrimination 340
Discrimination by National Origin in European
Soccer 342
Positional Discrimination or Hiring Discrimination 344
Gender Equity—A Special Case? 348
10.3 Title IX and Discrimination in College Sports 349
■■ Biographical Sketch: Branch Rickey 352
Summary 354 • Discussion Questions 354
• Problems 355

Part 5 Sports in the Not-for-Profit Sector 357

Chapter 11 The Economics of Amateurism and College

Sports 359
Introduction 359
Learning Objectives 360
11.1 The Troublesome Concept of Amateurism 360
A Brief History of Amateurism and the Olympic
Ideal 360
11.2 The Costs and Benefits of College Athletics 366
The Revenue from Intercollegiate Athletics 366
The Revenue from Bowl Games 369
The Cost of Intercollegiate Athletics 373
Do Colleges Profit from Athletics? 375
Spillovers from Athletics to the University 376
11.3 The Role of the NCAA 380
The NCAA as a Regulatory Agency 380
The NCAA as a Club 382
xvi Contents

The NCAA as a Cartel 383

Academic Standards: A Basis of Academic Integrity
or Monopoly Power? 387
11.4 The Returns to the Athlete 389
Pay for Play: The Grant-in-Aid 389
Measuring the Net Value of Athletes to Colleges 391
College as an Investment for the Student-Athlete 391
■■ Biographical Sketch: Anita Defrantz 396
Summary 397 • Discussion Questions 398
• Problems 398
Works Cited 399
Photo Credits 423
Index 425
 Preface

As The Economics of Sports reaches its fifth edition, it is interesting for us to reflect
back on the almost fifteen years since we began work on the first edition. When
the first edition was published, the field was relatively new but rapidly growing.
Undergraduate sports economics courses were popular, but not widely offered.
Today, sports economics stands as a vital subdiscipline within applied micro-
economics, with new and exciting research being produced by economists from
around the world. Along with the increased research, the number of sports eco-
nomics courses has grown as well. Throughout this process of growth and change,
sports economics continues to serve as both a mirror and a lens, reflecting our
broader culture and values, while at the same time bringing into focus such fun-
damental issues as fairness and the legitimacy of free markets. With the passing of
each season, new events unfold in professional and amateur sports that deserve
analysis and explanation. Finally, in the context of this book, sports economics
remains a vital and interesting area of study for students of economics. Sports
provides a seemingly endless set of examples from every area of microeconomics,
giving students the opportunity to study public finance, industrial organization,
and labor markets in a context that holds student interest like no other industry.
Over the many years that we have worked on this project, we have enjoyed
continuous help and support from students and colleagues at colleges and univer-
sities across the United States and around the world. Our colleagues continue to
offer encouragement, share classroom experiences, and suggest new and different
coverage as the industry evolves. For all of this support and help, we are most
grateful. And as we have said many times, we hope that our own enthusiasm, as
well as the enthusiasm others have shared with us, is reflected in the text.
In recent years, many outstanding books that concentrate on specific sports
or particular aspects of the economics of sports have been published. This text
stands apart from the others in that it has the instruction of economic concepts as
its central focus. We hope you find it useful and interesting.

New to This Edition

The fifth edition represents our most comprehensive revision and update of the
text since the first edition appeared in 2001. In doing so, we have retained the fea-
tures from previous editions that made learning about sports economics meaning-
ful as well as enjoyable, while at the same time incorporating many recent events
in the sports industry and the broader economy.
• We have introduced a new feature for the fifth edition: Sports and the Law.
Though we discuss the important decisions that have shaped the sports
industry throughout the text, we’ve chosen four specific cases that particu-
larly highlight the profound impact of the law in this industry. You will find
these features in Chapters 3, 4, 7, and 9.

xvii
xviii Preface

• Chapter 2 now contains a full review of production theory in the context of

team rosters as well as a review of the relationship between marginal prod-
uct and marginal cost.
• Chapter 3 has been rearranged to highlight the differences between profit-
maximization and win maximization as owner strategies. It also places
greater emphasis on the role of the theory of clubs as an explanation for the
recent turmoil in intercollegiate athletic conferences.
• We have supplemented our presentation of advanced profit-maximizing
strategies with a discussion of dynamic ticket pricing, including a compari-
son to variable ticket pricing and ticket bundling.
• The most significant change for this edition is the reorganization of Chapters 6
and 7. Chapter 6 now covers the benefits of public support for stadiums and
events such as the Olympics to owners, fans, and cities. Chapter 7 covers the
economics of financing these facilities and events. While much of the discus-
sion that users liked from previous editions has been retained, the new orga-
nization should lead to improved student understanding.
• Chapter 9 has been revised to provide a comprehensive explanation of the
process and outcomes of the new collective bargaining agreements in the
NBA and NFL.
• We have integrated Chapter 11 more fully into the rest of the book by
emphasizing such concepts as profit-maximization and spillovers that
appear elsewhere. This allows us to show more clearly how athletic depart-
ments resemble—and do not resemble—professional sports teams.
As with the previous editions, our goal for the fifth edition is to keep the
text comprehensive yet accessible. The text is designed to serve as the foundation
for undergraduate courses in sports economics. The nature of the subject matter
makes this a unique challenge. Unlike area courses such as industrial organiza-
tion or labor economics, which are self-contained fields in the broader area of
economics, sports economics cuts across a wide array of economic disciplines.
To deal with this problem, we have split the text into five parts, three of which
are devoted to illustrating prominent areas of economics: industrial organiza-
tion, public finance, and labor economics. We hope that this division provides
­students with an overview of much of economics and inspires them to pursue
each field in its own right. Because we focus largely on professional sports in
the first four parts of the book, we include a closing section devoted to amateur
sports. This final part provides insights into theories related to the not-for-profit
sector of the economy, such as the theory of bureaucracy. Each of the five parts of
this text presents significant economic theory and recent evidence and research
for that area of economics.
To make the text accessible, we assume that students have had one semester
of microeconomics principles. Balancing accessibility against an economist’s desire
for theoretical rigor remains a challenge. In order to help the students understand
the economics and to make the treatment more entertaining, we have included a
generous component of sports history to place the events and economic theory in
perspective.
 Preface xix

Intended Audience
Economics of sports classes are taught at a variety of levels, ranging from undergrad-
uate courses, with principles of economics as the only prerequisites, to the graduate
level. This text is designed to offer a high level of flexibility to the instructor. All the
material in the main body of the text should be accessible to students with a single
semester of microeconomics principles. In order to enrich courses taught at a higher
level, we have included appendices containing intermediate-level material at the end
of several chapters. To ensure that all students begin the course with a common back-
ground, we provide a substantial review of principles-level material in Chapter 2.
This material can either be covered explicitly with lecture support or left to the
­students to read on their own, as needed. For instructors interested in presenting the
results of econometric research, Chapter 2 contains an appendix on the fundamen-
tals of regression. In advanced undergraduate- and graduate-level courses, the text
can serve as a foundation for common understanding of basic concepts.

Organization of the Text and Coverage Options

As stated previously, the text is divided into five parts. The first two chapters pro-
vide an introduction to sports economics, a review of principles-level tools, and
an illustration of how economic principles apply to the sports industry. Chapters
3, 4, and 5 focus on the industrial organization of the sports industry. Here, we
discuss the competitive landscape, the implications of monopoly power, profit-
maximization, and competitive balance. Chapter 4 focuses specifically on issues
of antitrust and regulation and discusses how they have impacted the formation,
success, and, sometimes, the failure of leagues. Chapter 5 describes why leagues
are concerned about competitive balance, how competitive balance is measured,
and how leagues might attempt to alter the balance of competition in a league.
Chapters 6 and 7 focus on public finance. In this portion of the text, students learn
the benefits and costs of providing public support for stadiums and events, why
teams seem to have so much power over municipalities and why municipalities
fight so hard to keep the teams they have as well as court new ones. Chapters 8
through 10 focus on labor issues related to sports. Chapter 8 introduces the
­fundamental theories of labor markets, including human capital theory and tour-
nament theory. Chapter 9 covers monopoly unions and monopsony, two labor
market imperfections that profoundly impact the functioning of most sports labor
markets. Chapter 10 discusses discrimination. Finally, Chapter 11 focuses on the
economics of amateur sports, especially major collegiate sports. Because major
college sports is really an industry itself, this chapter serves as a capstone to the
text, incorporating the theories and concepts from many of the previous chapters.

Additional Resources
The text is accompanied by an online Instructor’s Manual, updated for the fifth
edition by George Diemer of Chestnut Hill College. We are pleased to provide
PowerPoint slides, written by Eva Marikova Leeds of Moravian College that
xx Preface

contain all figures and tables in the text as well as lecture notes for classroom
presentation. We are also pleased to offer a Test Bank for the fifth edition of the
text, written by, David Chaplin of Northwest Nazarene University which contains
additional questions and suggested answers for further classroom or test use. The
Instructor’s Manual, PowerPoint slides, and Test Bank may be accessed via the
Instructor’s Resource Center at www.pearsonhighered.com/irc.
Students and instructors may also access the text’s companion Web site at
www.pearsonhighered.com/leeds. Updated for the fifth edition, the Web site fea-
tures chapter quizzes, current Web links, and additional sports data.

Acknowledgments
In a project such as this, the list of people who contributed to its completion extends
far beyond those whose names appear on the cover. We owe personal and profes-
sional debts of sincere gratitude to a great many people. First, we thank our team
at Pearson including Noel Seibert, Emily Brodeur, Maggie Brobeck, and Carolyn
Terbush. We also are grateful for the advice, encouragement, and suggestions from
the ever-growing community of sports economists who use this book. Their input
and support serve as a continuing source of motivation and assistance. We would
particularly like to thank all of those who read and reviewed the manuscript as
we prepared the fifth edition, including Andrew Zimbalist, Smith College; Bruce
K. Johnson, Centre College; Mary N. Gade, Oklahoma State University; Nancy
Jianakoplos, Colorado State University; Phil Miller, Minnesota State University–
Mankato; Joshua Price, University of Texas–Arlington; and Wayne A. Grove, Le
Moyne College. Their suggestions for improvements were excellent, and we tried
our best to incorporate them wherever possible. A special thanks to Eva Marikova
Leeds for her diligent review of the manuscript during the revision process.
Finally, as always, we thank our families: Eva, Daniel, Melanie, Heather, Daniel,
Thomas, and Eric, all of whom provided unwavering support.
Michael A. Leeds
Peter von Allmen
The Economics of Sports
This page intentionally left blank
 Part One

Introduction and
Review of Economic
Concepts
Chapter 1 Economics and Sports
Chapter 2 Review of the Economist’s Arsenal
This page intentionally left blank
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