August 3, 2000

The Imbalance Sheet

Ticket Prices

by Keith Law

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When Jim Bowden announced the Barry Larkin signing, he managed to darken the mood slightly by admonishing the fans that they were getting exactly what they wanted...and that they'd have to pay for it. He told fans that ticket prices would be going up, perhaps as early as this season, because of the deal.

In a July 14 column in the Wall Street Journal, Sam Walker derided major-league teams for their wastrel ways, lavishing large guaranteed contracts on some really lousy players and then later releasing them. But in arguing that this was bad for the game, he made the assertion that these multi-million dollar goof-ups "contribute to higher ticket prices".

This claim--that higher player salaries lead to higher ticket prices--is oft-repeated but completely illogical. If baseball could just raise ticket prices willy-nilly whenever player salaries increased, the owners would spend themselves into oblivion, knowing that sure profits awaited because they could hike ticket prices to make up for the higher expenditures.

Economic analysis bears this assertion out. Economists spend a lot of time considering monopolies--some try to find them where they don't exist; on your dime, no less--and their behavior is reasonably well understood. Baseball teams are, in fact, monopolies. If you live in Boston and you want to see a major-league baseball game, you have one choice and you will pay through the nose for it. There are imperfect substitutes, but there is no perfect substitute, making the Red Sox one of a few dozen monopolies. (Some might argue that the Yankees and Mets constitute a duopoly and should compete on price if they're not colluding, but try telling a Yankee fan that he can always go to Shea if he doesn't want to pay for a Yankee ticket.)

Monopolists want to maximize their profits, just like all companies, but they have relatively free rein in the market. Assuming there's enough demand for the good, a monopolist will produce and sell another widget if the widget can be sold at a profit. The baseball widget is a ticket, and it costs nothing to produce: everything, from the stadium to the players to the union running the concessions, is already paid for.

Thus, to maximize profits, they maximize revenues: set ticket prices to a level such that the total revenue generated by ticket sales is higher than it would be for any other pricing structure. Teams all have software systems to help them determine the optimal pricing level. It's how they do business.

So Jim Bowden's bluster--that the Larkin contract just forced him to raise ticket prices, gosh darn it--is hot air. The Reds will raise ticket prices because fans will (they hope) be willing to pay more out of gratitude for the team's about-face on re-signing the popular star. In other words, the Reds think they can make more money in total by raising ticket prices, and they probably would have raised them for 2001 regardless of where Barry Larkin was playing.

Some teams do depend on ticket prices for a large chunk--40% or so--of their revenues, but the idea that these prices fluctuate with the fixed expense of team salaries is hogwash. If anything, higher ticket prices lead to higher salaries, since money in an owner's pocket tends to burn its way through to a free-agent signing.

Keith Law can be reached at klaw@baseballprospectus.com.