Wednesday, May 6, 2009

Mailbag, Vol. 1

A reader asks:
What would happen if pro sports stadiums weren't publicly funded? ... Suppose that you hold demand (not quantity demanded; the entire demand schedule) as constant. I think that this is basically the case, though I could be wrong. Now, assume that there is no public funding of stadiums, and that every team needs a new stadium right now.

What does the team do? Do they raise ticket prices for the new stadium, and allow QD (attendance) to fall accordingly? Do they build a smaller stadium than they otherwise would, anticipating said drop in QD? Alternately, does someone within the team organization pick up the tab that otherwise would have gone to the taxpayer? Somone's surplus is going to be lower. Will it be the owners? The players? The fans?
I love this question because it presumes that I know something about both baseball and economics. I suppose I do dabble in both of them, but I still had to go to The Font Of All Knowledge to make sure I correctly understood the difference between demand and quantity demanded. Happily, I did. In any case, those with actually expertise in the area of economics in general or stadium economics in particular may feel free to correct me if this post is completely off base. Now, on to the answer!

I think the first key point is that the baseball team is always going to select the profit maximizing price for its tickets, regardless of the cost of the stadium (or players, for that matter). Thus, if the same stadium is being built with or without public subsidy, the ticket price should be unaffected. The same product is being offered, so there is no reason to expect a change in the price the consumer is willing to pay.

Again assuming that the same stadium is being built with or without public subsidy, it is also true that the operating costs of the stadium, including players, will be unaffected. If paying A-Rod $300 million is a money maker with a stadium subsidy, then it is a money maker without a stadium subsidy. Thus, if the same stadium is being built in both cases, the only group that can take a loss is the team itself. 

Another way to think about it is that a fixed subsidy amount doesn't change the optimal configuration of the new stadium. If investing the subsidy in extra features for the new stadium could be expected to turn a profit, then the team would do it regardless of the existence of the subsidy. Likewise, if investing the subsidy in extra features for the new stadium was expected to be a money losing proposition, the team would (if able) cut back on its own contribution to the stadium, in effect pocketing the subsidy money.

However, a key element is left off of this analysis. The stadium plan is usually a large part of the negotiations with the local municipality. While it may not be cost effective for a team to invest $100 million in, for example, a retractable roof, it might be worth it if it only had to invest $50 million with the local municipality agreeing to kick in the rest.* Thus, the team will try to add features to the new stadium as long as the public subsidy increases to a level that makes the extra features a good investment of the team's money. The subsidy amount is generally not fixed with respect to the stadium plan.

What does this mean? It means that if public subsidies for private stadia ended, the team would start cutting the marginal features of the new stadium.** That retractable roof may no longer make sense. Of course, this adds a further complication. Since we are now dealing with two separate stadia, we cannot expect that operating costs and optimal ticket prices will be unchanged. Indeed, since fewer ammenities are being added, we would expect the profit maximizing ticket price to fall, not rise, since people would presumably be willing to pay more to attend games at a nicer stadium.

Thus, I conclude that public subsidies of new stadia lead to higher ticket prices for fans, but also to nicer stadia. Ending public subsidies would lead to lower ticket prices for fans, but also fewer and less opulent new stadia.

Let me finish with one final comment on the closing line from the email in question:
I just looked up the Jake on Wikipedia, and it said that they publicly funded their stadium, then sold out 455 straight games.
Jacobs Field is often used as an example of the benefits of new stadia. However, we must be very careful not to confuse correlation with causation. Yes, fans flocked to Jacobs field, but only a small amount of that should be attributed to the new stadium bounce. Indeed, the primary cause is likely to be that the Indians' general crappiness from 1987 through 1993 allowed them to draft a stunning core of players that fueled their run as a top team in baseball from 1994 through 2001. Think about what the Tampa Bay Rays are going through right now. It's like that, only in a town that actually cares about baseball. The new stadium was only the cherry on the top of the winning baseball sundae.

* I will further note that it is often the municipality that bears the risk of cost overruns. This provides a perverse incentive for owners to underestimate costs so as to drive down their share of the initial cost with the local municipality bearing any extra costs due to the low initial estimate.

** It is not clear to me what the effect would be on stadium capacity. I suspect that capacity is a relatively low cost item in the stadium plan with a correspondingly high marginal value. Indeed, ending public subsidies could even increase stadium capacity. It may be that if a team cannot charge hundreds of dollars for a more exclusive experience with many ammenities that the best option is to instead try to get as many normal blue-collar Joes as possible. In any event, I find it unlikely that capacity would decrease.

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