Monday, March 3, 2008

Do high player salaries cause high ticket prices?

Alex Rodriquez, arguably the best baseball player in recent history, has played for the New York Yankees for 4 years. Imagine that Rodriquez becomes a free agent and auctioned himself to the highest bidder. Consider the following two scenarios:

* The Tampa Bay Rays sign Rodriquez to a big contract.
* The New York Yankees re-sign Rodriquez to a big contract.

Would you expect ticket prices to rise for the team that signs Rodriguez? Explain why or why not.

Sorry, no winner this week. Player salaries represent a fixed cost to pro sports teams. Thus, no matter how many tickets a team sells, A-Rod's salary will not change. What matters in the setting of prices for tickets are the marginal costs of selling one more ticket. However, it's reasonable to believe that such costs are quite small in the great scheme of things. The more important factor in determining ticket prices is the demand for tickets. When a team hires a superstar such as A-Rod, you would expect the demand for tickets to surge among fans, thus putting upward pressure on ticket prices. The surge in demand, though, is likely to be seen only in cities/franchises that sign a "new" superstar. When a team simply re-signs its current superstar, it's unlikely that there will be a new surge in demand for a player who has already been playing with the team for four years. Thus, if ticket prices were to rise in any of the cities above, it's likely to be Tampa Bay and not New York.

Finally, it should be clear that rising ticket prices are
not caused by rising player salaries. Rather, it is just the opposite: rising salaries are generated from rising ticket revenues (due to rising ticket demand).

4 comments:

Celia Brockway said...

Yes, ticket prices for either team would rise if they offer him a big contract. In the consumer's eyes, this contract increase creates a higher demand to see Alex Rodriquez. Therefore, the demand curve would shift to the right causing the ticket price to increase.

Celia Brockway said...

Yes, ticket prices for either team would rise if they offer him a big contract. In the consumer's eyes, this contract increase creates a higher demand to see Alex Rodriquez. Therefore, the demand curve would shift to the right causing the ticket price to increase.

David Graham said...

Yes, ticket prices would rise. The increase in the cost of an input(his salary) into the team's business would cause a leftward shit in the supply curve. This would lead to an increase in the price of tickets.

yangdi said...

I think the ticket price will not change. On the demand side, there is no incentive that may shift the demand curve, so it stays the same. On the supply side, I think the number of games won't change wherever Alex plays, so the supply curve doesn't shift either. Thus, the equilibrium price and quantity will not change at all. About the bid price, it must be less than the marginal benefit of Alex, otherwise the team will lose money.