Supply of Sports: Economy and Maximizing Profits or Wins at University of Palermo

Sports Supply Overview

Sabrina Auci
University of Palermo

Sources of Sports Supply

• The supply of sports come
  from three different sources:

. These three sectors have
different objectives:

• Government sector
• Not for profit sector
• Commercial sector
• Maximize society well-being
• Maximize society well-being
  or the well-being of smaller
  groups of consumers
• Maximize profits

Interrelations in Sports Economics

• The interrelation between the three sectors depends on the nature
  of this good.

. If sport is considered as a private good, then the market can supply
efficiently.

• If sport is considered as a public good, then the government can
  supply efficiently.

Weisbrod Model (1978) - Part 1

. This model is based on three aspects:

. First, there are three types of goods:

• Public or collective consumption goods
• Private goods as substitutes for collective consumption goods
• Pure private goods

. In general, the government provides the collective consumption
goods, but also the voluntary and commercial sectors can provide
additional supply, depending on the nature of the good:

• The more collective the good, the more the voluntary sector provides.
• The more private the good, the more the commercial sector provides.

Weisbrod Model (1978) - Part 2

• Second, this model considers the relationship between the
  fragmentation of supply and the heterogeneity of
  demand.

. The less/more heterogeneous the demand the greater/less the
share of production by government.

• This because the production by government is based on the
  majority of vote:
• If consumers are homogeneous but not numerous to be relevant
  in the vote process, then the good consumed is hardly produced
  by the government.

Weisbrod Model (1978) - Part 3

. Third, the income hypothesis generally holds.

• As the government in producing the good is less
  consumer-friendly, there is space for the commercial
  sector to produce sport goods.

. However, the higher the income of consumers, the closer
the characteristics of the good should be to the consumer's
requests.

• The commercial sector is more inclined to satisfy the
  consumer's requests at a higher price.

Weisbrod Model (1978) - Part 4

. The sports good presents both private and public
characteristics and it has also positive externalities by
improving community health conditions.

• For this reason, the government plays a pivotal role in
  providing sports goods, while the residual demand is
  covered by the commercial sector by setting up fitness
  centres.

Government Supply - Part 1

• The government intervention is motivated by market failures:
  sports good has a public nature and produces positive
  externalities.

. In both cases, the quantity produced by government exceeds
the quantity that should be produced by the private sector.

• The government is an efficient producer when the demand
  for sports goods is homogeneous, meaning that there is a
  large consensus among citizens

Government Supply - Part 2

. Even the government can fail in providing the public good.

• This may be because:

. Government doesn't have an incentive to correct the problem

• Only the minority is interested
• Government doesn't have enough information to deal with the
  problem (heterogeneous demand)
• The bureaucratic nature of government intervention does not
  allow fine-tuning

Voluntary Supply

. In case of government failure, the voluntary sector can be
more efficient.

• Two different types of distinct voluntary organizations are:

. Sports Clubs: these organisations are financed by members and their
benefits are exclusive to members. The goods provided by the clubs have
the excludable but non-rivalrous characteristics.

• Non-profit organizations: these organisations are financed in various
  ways. By the government through subsidies or by the private sector through
  donations and sponsorships. In different occasions, the government may
  be more advantageous in terms of financing these organizations rather than
  providing the goods directly.

Commercial Supply - Part 1

• The commercial sports sector includes:
• Sports goods: the production and distribution of sports goods such as equipment,
  cloths, shoes, and all goods in relation with sport activities.
• Sports services: include
• Sporting events and/or shows:
• the expenditure on participation in sporting events as spectators
• the cost of access and subscriptions to sporting facilities for practising sport
• Media:
• the expenditure on subscriptions to television programmes or specialised newspapers
• Commercial leisure:
• the expenditure on health and fitness centres as well as sporting clubs
• Sponsorships:
• sponsors of sports sector
• Sporting business:
• the expenditure on professional consultancy services related to sport
• sporting agents

Sports Market Data - Part 1

. Based on the data of the last "Rapporto Sport 2023" by Istituto per il
Credito Sportivo, we may say that the Italian sport sector has reached a
significant economic size of approximately €22 billion, contributing 1.3%
to the national GDP.

• Sport is a well-established industry, with a powerful leverage effect in
  terms of economic spin-offs, and a significant incidence in terms of
  employment.

. The Sport system has retained a core workforce of approximately
400,000 employees, due in part to the presence of over 15,000 private
enterprises, around 82,000 non-profit organisations and almost 900,000
volunteers.

Sports Market Data - Part 2

• The market value of the sports industry is estimated to be 84%
  derived mainly from induced activities.

. It is estimated that more than €10 billion of the GDP of sport is generated
by closely related activities (such as the production and sale of sports
equipment and clothing), while a further €8.4 billion is generated by
sectors related to sport in the broader sense (such as sports media,
tourism, transport and medical services).

• The 'core' segment of the industry, which includes facility management,
  sports clubs, gyms, and other activities (such as the promotion of sports
  events), contributes €3.4 billion to the sector's added value, of which 79%
  is generated by private companies, compared to 21% by public
  administrations and private non-profit institutions.

Sports Leagues Structure

• Leagues provide the basic structure required for
  competition such as scheduling, setting rules and
  organizing championships.

. Early leagues in US and Europe were explicitly not-for-
profit organizations, now they create economic
conditions that allow member teams to flourish
economically.

Sports Leagues Functions

• The main functions of the leagues are:
• League-wide marketing to promote the sport
• Collective bargaining with player associations
• Organizing revenue-sharing arrangements to promote financial stability of
  teams
• Controlling entry to maintain monopoly power (especially for closed
  leagues)
• The league structure may be:
• Open leagues: more common in Europe
• Closed leagues: more common in US

Closed Sports Leagues Characteristics

• Main characteristics of closed leagues:
• Teams do not change from season to season, except when changes are
  approved by the existing owners.

. Each team is located in a fixed home city.

• The league has affiliated minor leagues that are lower leagues with which
  the major league teams have an explicit contractual relationship. In
  particular, the rights of minor league players are usually held by the major
  league. Players are promoted and demoted several times between major
  and minor leagues during their careers.

Open Sports Leagues Characteristics

• Main characteristics of open leagues:
• Lower-division teams are potential competitors of teams in higher divisions
  because teams can switch leagues through promotion and relegation.

. A single city hosts multiple teams in a given league.

• Having several teams in one city significantly reduces the monopoly power
  of each individual team.
• Incentives for the weakest teams near the end of the season: teams near
  the bottom must continue to win to avoid relegation.

Economics of Team Behaviour - Part 1

• Each team is an independent economic entity, but it is
  affiliated within a league.

. Thus, each team makes its own strategic decisions
regarding factors that impact revenues and costs.

. However, teams are worse off when their competitors go
bankrupt, so they prefer to share significant revenues to
ensure that does not happen.

• This behaviour is completely different from that of a
  competitive firm.

Economics of Team Behaviour - Part 2

• In economics, the goal of a competitive firm is to maximize
  profit ...

...

• In sports economics, the goal of a team may be "win"
  instead of profits: for some owners, winning a championship
  may outweigh the bottom line.

Maximizing Profits or Wins - Part 1

. Teams as firms have both long-run and short-run goals.

. While in the long-run, teams must remain profitable to
stay in business, they may pursue wins in the short-run.

• Both closed and open league teams are incentivized to
  pursue win maximization over profits in the short-run.

Maximizing Profits or Wins - Part 2

• In Europe, this is truer because:
• Teams are operated by football clubs that are owner by fans who prefer
  celebrating a championship with respect to receiving a small dividend at the
  end of the year.

. To avoid relegation, teams spend whatever they can on players, thus
they need deep-pocketed owners who are willing to sustain financial losses
to earn championship.

. However, even if this financial support may benefit the team, it can
alter the competitive landscape and the overall financial stability of
the league.

• For this reason, the UEFA adopted the "Financial Fair Play" rules
  in 2010 to promote financial solvency by limiting team spending.