Monopoly and Antitrust

Inefficiency of Monopoly Competitive Outcome

P = PC = MC Q = QC

Monopoly Outcome PM > PC = MC Q = QM < QC

MRD

MC

QM

PM

QC

Comp Monop

CS

PS

Welfare

DWL

A

BC

A

B

C

A+B

A+B+C

--

A+B+C

-- Rent-seeking may add to DWL

quantity

$

PC

Price Discrimination Pricing strategy that attempts to capture

more consumer surplus Types

1st Degree: 2nd Degree: 3rd Degree:

Necessary Conditions Market power Segment the market Prevent resale

Charge each consumer the highest price they’re WTP

Quantity discounts

Charge prices based on price elasticities

First Degree Price Discrimination

Monopolist is able to capture CS …and eliminate DWL by selling until P = MC

MRD

MC

QM

PM

QC

CS

PSDWL

Second Degree Price Discrimination

Offering discounts based on the number of games attended

Offering discounts based on the number of people in your group

MRD

MC

QM

PM

QC

Third Degree Price Discrimination Segment market into groups with differing

elasticities Adults Senior citizens

Profit max rule: MRA = MRS = MC MRA = PA[1 – 1/EA]

Example: EA = 3

ES = 5

MC = 8 Charge higher price to group with less elastic demand

PA = $12PS = $10

Personal Seat Licenses People pay for the right to buy season tickets Two-part tariff: entrance fee + per unit charge

Per unit price = MC Entrance fee = resulting CS

MRD

MC

QM

PM

QC

Monopsony Monopoly on the buyer side

Labor Market and the Reserve Clause BBC and English Soccer

Barriers to Entry Broadcast contracts

NFL spreads contracts out over CBS, Fox, NBC, ESPN USFL

Pre-emptive franchise location AFL vs NFL in Dallas and Minneapolis

Antitrust Law Sherman Act (1890)

Section 1: prohibits cartels (or “trusts”) Every contract, combination in the form of a trust or

otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations is hereby declared to be illegal.

Section 2: attacks monopoly itself Every person who shall monopolize or attempt to

monopolize any part of the trade or conspire with any other person or persons to monopolize any part of the trade or commerce among the several states or with foreign nations, shall be deemed guilty of a misdemeanor…

Federal Baseball v NL (1922) Federal League

(1914-1915) Brooklyn Chicago Pittsburgh St. Louis Baltimore Buffalo Indianapolis Kansas City

National League (1876 – present) Boston Brooklyn Chicago Cincinnati New York Philadelphia Pittsburgh St. Louis

American League (1901 – present) Boston Chicago Cleveland Detroit New York Philadelphia St. Louis Washington

US Supreme Court ruled: “baseball was not interstate commerce” Implication: Baseball is exempt from antitrust laws

Toolson (1953) Flood (1972)

Contrast with NFL Radovich v NFL (1957)

Blacklisted for playing in AAFC NFL lost at Supreme Court

no legal monopoly power or monopsony power Tried to retain monopsony

“Gentleman’s Agreement” until early 1960s “Rozelle Rule” imposed when that broke down

Successful antitrust suit in 1970s by John Mackey Players’ Association negotiated deal that allowed Rule to

continue

Tried to establish monopoly Got limited exemptions for TV and merger with AFL No games on Friday (HS) and Saturday (NCAA)

MLB has had few challengers Federal League was last major rival Other leagues have had regular challenges

Baseball has been stable Montreal Expos moved to Washington – 2005 Washington Senators to Texas – 1972 Blocked attempts by Giants, White Sox, Pirates

Impact of Baseball’s Exemption

NFL Has Been Far Less Stable 1980: Oakland Raiders sue NFL

Challenged NFL’s right to block move to LA Brought antitrust suit Jury – drawn from LA! – agrees

NFL cannot force other teams to stay put Moves from Baltimore, Cleveland, LA (2X),

Houston, St. Louis Did dissuade

New England from moving to Hartford, CT Seattle from moving to LA

Cartel Theory Game Theory

“Prisoner’s Dilemma” NY Yankees

High Price Low Price

NY Mets

High Price

$500k$500k

$700k$200k

Low Price

$200k$700k

$300k$300k

Dominant Strategy?

Each team would set Low Price

Competitive Outcome: (Low, Low)

Cooperative Outcome: (High, High)

Unstable due to incentive to cheat

Nash Equilibrium

18 football-related deaths in 1905 President Roosevelt threatened to take action NCAA formed to control “on the field” behavior

The Sanity Code (1946) Drew up rules for “off the field” behavior

Limits to financial “aid” to athletes “Seven Sinners” refuse NCAA fails to get 2/3 majority needed to expel

NCAA in tatters – cannot enforce own rules

NCAA: An Incidental Cartel

New Life for the NCAA “Point shaving” scandal breaks out in 1952

CCNY ruined as national power Kentucky implicated

UK Coach – Adolph Rupp – likely involved as well Also found illegal payments to players by Rupp

NCAA failed to respond Embarrassed SEC suspends UK

NCAA establishes “Death Penalty” Boycott by other members UK is suspended for one season

SMU football 1987-88SW LA basketball 1973-75Morehouse soccer 2003MacMurray tennis 2004-07

Applying the NCAA’s Cartel Power

Monopsony Power Drive down price of labor Problem: Schools cheat

Monopoly Power Early TV contract

Limited teams to 3 TV games every 2 years CFA lobbied for more TV

NCAA created I-A and I-AA; reworked revenue sharing CFA filed Antitrust lawsuit against NCAA (1984) Now many broadcasts – but less revenue!

Competitive Balance

The Value of Uncertainty of Outcome

Turnover in Champions? 1949

Yankees beat Dodgers 1950

Yankees beat Phils 1951

Yankees beat Giants 1952

Yankees beat Dodgers 1953

Yankees beat Dodgers 1954

Giants beat Indians 1955

Dodgers beat Yankees 1956

Yankees beat Dodgers

1957 Braves beat Yankees

1958 Yankees beat Braves

1959 Dodgers* beat White Sox

1960 Pirates beat Yankees

1961 Yankees beat Reds

1962 Yankees beat Giants

1963 Dodgers* beat Yankees

1964 Cardinals beat Yankees

In 1960s only 2 NBA champions Celtics Champions 1959-66, 1968-69

Since 1980 only 9 NBA championsLakers: 1980; 1982; 1985; 1987-1988; 2000-2002; 2009-2010

Bulls: 1990-1993; 1996-1998

Spurs: 1999; 2003; 2005; 2007

Celtics: 1981; 1984; 1986; 2008

Pistons: 1988-1989; 2004

Rockets: 1994-1995

Heat: 2006

Mavs: 2011

Sixers: 1983

Is Baseball Unique?

Champs since 1980MLB: 20NFL: 15NHL: 15NBA: 9

Leagues Want Competitive Balance Stimulates interest

Attendance TV Ratings

Team dynasties? Are Yankees bad for baseball? “law of diminishing returns” Market size effects

What is competitive balance? Even competition in each game? Turnover among champions?

MRS

MRL

WS WL

Winningpercentage

$

MC

Measuring Competitive Balance Between Season Variation

Hirfindahl-Hirschman Index (HHI) HHI quantifies turnover in champions Also used to measure monopoly power

Where: ci=#championships by team i;

T=#Years; N=#Teams

2

N

i

i

THHI c Large HHI means

few teams dominate

What is the HHI for the NBA since 1987? Championships

Chi: 6 LA: 7 Det: 3 SA: 4 Hou: 2 Miami: 1 Boston: 1 Dallas: 1

N =25 years

HHI =

HHI = 0.187

22222222

25

1

25

1

25

1

25

2

25

4

25

3

25

7

25

6

Baseball and the HHI1950s

AL Champions Yankees (8); Indians;

White Sox HHI= .660

NL Champions Dodgers (5); Giants (2);

Braves (2); Phillies HHI= .340

2000s AL Champions

Yankees (4); Red Sox (2); Angels; Tigers; White Sox; Rays

HHI=.240 NL Champions

Cardinal (2); Phillies (2); Marlins; Diamondbacks; Giants; Astros; Rockies; Mets

HHI= .140

Competitive Balance Within Season Variation

“evenness of competition” standard deviation

average distance that observation lies from mean

Actual: σW =

Ideal: σI =

Ratio: R = σW / σI

T

WP )500.(2

G

500.

R > 1 indicates imbalance

T = number of teams

G = number of games

Dispersion of Winning Percentage for 2011 or 2010-11 Season

Standard Deviation

League Actual Ideal Ratio

NBA .158 .056 2.82

EPL .108 .081 1.33

MLB .069 .039 1.77

NFL .201 .125 1.61

NHL .080 .056 1.43

Example: 60-40 Gate split

NY: RG = $36m and C = $28.8 πNY = $7.2mKC: RG = $18m and C = $16 πKC = $2.0m

πNY = 0.6(36) + 0.4(18) – 28.8 = $0πKC = 0.6(18) + 0.4(36) – 16 = $9.2m

Attempts to Promote Competitive Balance

Revenue Sharing Indirect method of redistributing players Two conditions:

Teams must benefit financially from improving performance Players must be able to move among teams

Salary Caps

Luxury Taxes

Attempts to Promote Competitive Balance

Yankees: (212.75-178)(.40) = $13.9mSoft caps:• “Larry Bird exemption”• Injuries/Bonuses

Cap Floor Notes

NFL (2011-12) $120m $108m Cap = % DGR

NBA (2011-12) $58.04m $49.3m Player max 25%, 30%, 35% of cap

NHL (2011-12) $64.3m $48.3m Player max $12.86m

Notes

MLB (2011) Flat rate on amount over threshold

50% player benefits50% IGF + dev. countries

NBA (2011-12) Progressive tax on amount above threshold

$1.5 ($5m or less)$3.25 ($15-25m over)50% goes to non-violators

2003 2004 2005 2006 2007 2008 2009 2010 2011$0

$5

$10

$15

$20

$25

$30

$35

$40

MLB Luxury Tax (2003-2011)

Yankees Red Sox Angels Tigers

Lu

xu

ry T

ax P

aid

(in

million

s)

“Change is needed and that is reflected by the fact that over a billion dollars has been paid to seven chronically uncompetitive teams, five of whom have had baseball’s highest operating profits,” the Globe quoted Henry as saying. “Who, except these teams, can think this is a good idea?”

John HenryOwner, Boston Red Sox

December 2009

Reverse Order Drafts

Schedule Adjustments

Promotion and relegation

Attempts to Promote Competitive Balance

Incentive to lose late in season?

Impact of Strategies What is correlation between payroll and winning?

Payroll

WinningPercent

?

Correlation coefficient = +1.0 ?

$50,000,000.00 $100,000,000.00 $150,000,000.000.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

NFL 2009W

innin

g P

erc

enta

ge

Impact of Strategies Correlation between payroll and winning: 2010-11

Coase Theorem Initial allocation of player rights does not affect

distribution of talent

Sport Correlation Coefficient

NFL .317

MLB .410

NBA .571

NHL .734

Simon Rottenberg’s “Invariance Proposition”

Baseball’s Reserve Clause Reserve Clause: players are the property

of the team that drafted them Free Agency: players can negotiate with

any team

Texas New York

Revenue = $20m Revenue = $40m

Salary = $1m Salary = $1.1m

Reserve Clause

Revenue = $20m Revenue = $40m

Salary = $21m

Free Agency

Impact of Strategies Low correlation between payroll and winning

Coase Theorem Initial allocation of player rights does not affect

distribution of talent Reserve clause is no different than free agency Reverse order draft should have no long-term effect

Public Finance

The Market for Sports Franchises

1952 National League: Team Standings

Team Wins Losses WP GB

Brooklyn Dodgers 96 57 .627 0

New York Giants 92 62 .597 4½

St. Louis Cardinals 88 66 .571 8½

Philadelphia Phillies 87 67 .565 9½

Chicago Cubs 77 77 .500 19½

Cincinnati Reds 69 85 .448 27½

Boston Braves 64 89 .418 32

Pittsburgh Pirates 42 112 .273 54½

1952 American League: Team Standings

Team Wins Losses WP GB

New York Yankees 95 59 .617 0

Cleveland Indians 93 61 .604 2

Chicago White Sox 81 73 .526 14

Philadelphia Athletics 79 75 .513 16

Washington Senators 78 76 .506 17

Boston Red Sox 76 78 .494 19

St. Louis Browns 64 90 .416 31

Detroit Tigers 50 104 .325 45

Golden Age of Baseball: 1903-1952

No teams entered, exited, or changed cities Construction of “old” parks Change:

Boston Braves Milwaukee (1953) St. Louis Browns Baltimore Orioles (1954) Philadelphia A’s Kansas City (1955) Brooklyn Dodgers Los Angeles (1958) NY Giants San Francisco (1958)

Shibe Park (Phil)Fenway Park (Bos)Forbes Field (Pit)Comiskey Park (Chi)Navin Field (Det)Wrigley Field (Chi)Yankee Stadium (NYY)Ebbets Field (Brk)

Dodger Blues? Before the move

Most profitable team in MLB Alone accounted for 47% of NL’s profits

Key Lessons No city “safe” Starts involvement of cities

Before 1950 – only 1 stadium publicly built By 1980 – almost all were

What Power do Teams Have?

Monopoly Power All-or-Nothing Demand Curve Winner’s Curse

Monopoly Power: Limit Output

Leagues slow to expand By 1953: U.S. demographics had changed

LA had no baseball teams – St. Louis had 2 Baseball & Football moved rather than expand

NFL did absorb 5 teams from rival leagues MLB expanded (1961-62)

Prevent new league (Continental League) Minnesota, Houston, NY Mets, LA Angels,

Avert Congressional intervention (Senators) NFL expansion tied to AFL

First expanded (1960) to try to kill it Next expanded (1966) to merge with it

All-or-Nothing Demand Curve

Firms generally can’t set both price and quantity Standard monopoly pricing

sets price at P1 and allows buyers to buy Q1

Consumers earn surplus Firm earns profit

Teams confront cities with an all-or-nothing choice: Point A

How far can you push consumers?

Consumers willing to absorb loss as long as net gain in CS is positive

D

Games

MR

MC

$

P1

Q1 Q2

ALoss

Surplus

Paper Clip Auction

Guess how many clips are in the cup ($1 for closest guess)

Each clip is worth $0.03 Write down your bid (and name) on a piece of

paper

Average bid usually lower than actual money value of clips Winning bid will generally exceed money value Why did winner overbid?

Most bidders are risk averse Not all bidders have same expectations Only most optimistic bidder wins the prize Does winning the auction become the goal itself?

Winner’s Curse

Buyer overbids due to uncertainty over value of prize

V =

Who wins?

Winner expects greatest payoff – could be: Best suited to exploit opportunity Most optimistic Most intent on winning per se

Olympic “competition” for host site

)1()1()1(13

32

21

rB

rB

rB

rB

TT

V = bidder’s valueBt = benefits of prizer = interest rate

Case in Point: The Olympics

1976 Montreal: C$1.6 billion Debt ~C$1.0 billion paid over 30 years

1984 LA Only city to bid on 1984 Summer Olympics $200 million profit!

2004 Athens: $15 billion 2008 Beijing: $42 billion 2010 Vancouver: $9.2 billion 2012 London 2014 Sochi 2016 Rio de Janeiro

Cost of 2010 Vancouver Winter Olympics

Bid budget $34,000,000

Security $900,000,000

Sea-to-Sky Highway expansion $1,980,000,000

Canada Line construction $1,900,000,000

Venue construction $580,000,000

Cypress Bowl ski facility upgrade $16,600,000

Athlete’s Village construction $1,080,000,000

Opening ceremonies $58,500,000

VANOC operating budget $1,750,000,000

Hillcrest/Nat Baily Stadium Park $40,000,000

Vancouver Convention Centre expansion $883,000,000

Event tickets for provincial MLAs and cabinet ministers

$1,000,000

TOTAL $9,223,100,000

http://this.org/magazine/2010/01/12/alternative-budget-olympics-vancouver-2010/

Lake

Plac

id 19

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Mos

cow 1

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Saraje

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Calgar

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Seoul

1988

Albertv

ille 1

992

Barce

lona

1992

Liliha

mm

er 1

994

Atlant

a 19

96

Nagan

o 19

98

Sydne

y 20

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Salt L

ake

2002

Athen

s 20

04

Torino

200

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Beijing

200

8

Vanco

uver

201

0

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200

400

600

800

1000

1200

1400

1600

1800

2188 103

287325

403

292

636

353

898

513

1332

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1493

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Olympic Broadcast Rights

Mil

lio

ns

of

US

$

Stadium Economics

What’s true about each facility in Era #1? Name of owner/builder “park” or “field”

In Era #2? Reflects source of

funding Municipally built

In Era #3? Naming rights

$2m per year What do firms get for

naming rights?

Era #1 Era #2 Era #3

Forbes Field Cleveland Municipal Stadium

Network Associates Field

Wrigley Field Atlanta-Fulton County Stadium

Continental Airlines Arena

Shibe Park Milwaukee County Stadium

Ericsson Stadium

Crosley Field Tampa Stadium Minute Maid Field

Ebbets Field Oakland-Alameda County Stadium

US Cellular Field

What’s in a Name?

Size Matters

Saw that baseball teams seldom sell out Why?

Optimal size for baseball stadium 30-40,000 Football has larger optimal size

Used to rent space from baseball teams in off-season Municipal stadia built when football took off

Shape Matters, Too

“Old School”

Municipal “Cookie Cutters”

Retro Look

MetrodomeMinneapolis, MN

Location: The Urban Ballpark

Retro location?

Stadia often not even in home city Arlington Cowboys vs East Rutherford Giants

Old ballparks not built downtown > Yankee Stadium built in “Goatville” > Shibe Park on site of Hospital for Contagious Diseases

Location:Cars and Costs Fans have moved to suburbs

Urban neighborhoods decay Need place to leave cars

Result: “a sea of asphalt” Stadium is “space intensive”

Creates problems for a downtown location Space costs money

The Rent Gradient Center City v. Outskirts

Why are NYC hotels taller than in Zanesville, OH?

Cost of land falls as move from center of town Height of buildings mimics

cost curve

Cost of land

Distance from city center

Rent gradient

Two of the perennially top-ranked college hockey teams in the country are Harvard and Yale. While tending to be alike in their national rankings, they differ greatly in their playing style. Harvard consistently opts for fast but small players while Yale fields slower but brawnier skaters. This difference in playing styles has persisted over the past several decades despite coaching changes and turnover in player personnel. What accounts for the difference? Explain in terms of economic analysis.

200 x 85 ft

Yale Ingalls RinkNew Haven, CT

204 x 87 ft

72.8” and 197 lbs. 70.4” and 184 lbs.

Public Finance II

What’s in it for the cities?

Having a football team back in Houston will bring thousands of visitors to our city, and it will generate millions of dollars in our city. I’m excited about our new stadium with a retractable roof. And we’re also very happy about getting a Super Bowl, and as you know that’s very important economically to the city. It will generate probably $300 or $400 million into our economy. But more importantly, it focuses attention on a city that people do not know enough about.

Houston Mayor Lee Brown, 1999.

Without the Chiefs and the Royals, Kansas City would be nothing but another Wichita… or Des Moines… or Omaha.”

Kansas City mayor Emanuel Cleaver, 1997.

Political Rhetoric

What is the role of Government?

Set and enforce rules of behavior Macroeconomic stabilization Deal with monopoly Provide public goods Deal with externalities

What are Externalities? Costs/Benefits imposed on non-consenting people Spillover effects

Negative Externalities What you do hurts me You don’t compensate me

Positive Externalities What you do helps me I don’t compensate you

Impact of Negative Externality

Free Market: P1, Q1

Games cause congestion imposes cost on others shifts supply curve left

Optimal Outcome: P2, Q2

Free market “overproduces” causes DWL

What can government do?

D1

Sprivate

Games

$

P1

Q1

Ssocial

External costP2

Q2

Impact of Positive Externality

Dprivate

S1

Games

$

P1

Q1

External benefit

P2

Q2

Free Market: P1, Q1

Games generate “winning attitude” generates benefits for others “social” demand is above “private”

demand

Optimal Outcome: P2, Q2

Free market “underproduces” causes DWL

What can government do?

Dsocial

Subsidizing Team Losses

Standard monopoly with high fixed costs may suffer losses

Government may offer subsidies to keep team in city

Subsidy =

PM

MC

ATC

DMR

QMQuantity

$

ATC

Can a Stadium be a Profit Center for a City?

Revenues Rental Payments Share of Concessions, Parking, Luxury Boxes, etc.

Costs Standard operating costs (labor, utilities, etc) Depreciation (facility will eventually be worthless) Opportunity Cost: could have invested $$ elsewhere Foregone tax revenue – city can’t pay itself

Baltimore Ravens pay no rent. Chicago White Sox pay $1 per year Cleveland Indians pay rent on a sliding scale:

$1.25 per ticket if A > 2.5 million $1.00 per ticket if 1.85 < A < 2.5 million $0.00 per ticket if A < 1.85 million

Cleveland Cavaliers pay rent on same sliding scale as Indians

San Diego Chargers City receives 10% of ticket revenue City reimburses team 100% of value of unsold tickets

Ex: $50 ticket Chargers receive $27 [=(50)(.90)(.60)] if sell ticket Chargers receive $50 if don’t sell ticket

Examples of Stadia Rent

Calculating the Implicit Subsidy

S = Operating Revenue – [Depreciation + Opp Cost of Funds + Foregone Taxes]

Estimated Annual Subsidies($Thousands)

Facility NOR (1)

DEP (2)

OCF(3)

FPT(4)

Subsidy (1)-(2+3+4)

Green Bay’s Lambeau Field (Minimum)

150 153 155 31 189

Atlanta Fulton County Stadium (Average)

–1,478 2160 3,243 649 7,530

New Orleans’ Superdome (Maximum)

–7,922 8,572 21,400 4,260 42,174

Note: NOR = Net Operating Revenue DEP = Depreciation OCF = Opportunity Cost of Funds FPT = Forgone Property Taxes

Source: Quirk and Fort (1992).

Measuring the Value of a Franchise

Economic Impact Studies Cost/Benefit Studies

“Professional sports are an insignificant part of a large city’s economy. For example, in Chicago, the entire professional sports industry accounts for .08 percent of Chicago’s personal income. To put the matter in a somewhat different perspective, the sales revenue of Fruit of the Loom exceeds that for all of Major League Baseball (MLB), while the sales revenue for Sears is about thirty times larger than that of all MLB revenues.”

Robert BaadeSports Economist

Lake Forest College

Measuring the Value of a Franchise

What Do the Sabres Bring to Buffalo?

2003 estimates by NY State Comptroller: $31M in gate receipts $8.6 M in concessions revenue $4 M in advertising and broadcast revenue

Subtotal: $43.6 million Total Impact = $65 million = ($43.6) x (1.5)

Multiplier

Multiplier Effects

Initial spending generates ripple effects

DY= DX + DX*MPC + (DX*MPC)*MPC+…

DY= DX*(1+MPC+MPC2+MPC3+MPC4+…)

DY= DX

ExampleDX = $35MPC = 0.80

Where: X = initial spending Y = aggregate income MPC = ΔC / Δ Y

MPC1

1

Simple multiplier

Δ Y = 35(5) = $175

The higher the MPC, the higher the multiplier.

Modified Multiplier

Mlocal =

Example: MPC = 0.80 f = 0.5

fMPC *1

1

Where f = fraction of spending that is local

Mlocal = 1.67

Benefits of a Franchise Direct Benefits (New Spending)

Higher APC? Net exports?

Players live elsewhere? Substitution effects?

Indirect Benefits Positive externalities?

Big league image Sense of identity

And now, YOUR Columbus Blue Jackets!

Chicago has 5 major league franchises

Sports account for .08% of personal income

MLB revenues < Fruit of the Loom

Single team worth less than sizable department store

Buffalo Sabres: $65 million

Marietta College: $40 million

Costs of a Franchise

Direct Costs Construction Operating Depreciation Opportunity cost of funds

Indirect Costs Negative externalities

Crime Congestion Noise

Such costs may already have beeninternalized for older stadiums

Teams and Jobs

Arizona Diamondbacks [Deloitte and Touche]

340 full-time jobs Cost to city: $240 Million $706,000 per job

Baltimore Ravens [MD Dept of B&E Development]

Cost per job: $127,000 - $331,000

Baade and Dye (1990)

“Impact of Stadiums and Professional Sports on Metropolitan Area Development”

Uses sample of 30 cities 1958-87

Dyit-Dyit-1 = b0 + b1*NTit + b2*NSit+…+ eit

Neither coefficient (b1 or b2) statistically significant

Growth in per capita income

Number ofTeams

Number ofStadiums

Expenditure

CS

Other Studies Rappoport and Wilkerson (2001) looks at Quality of Life

Direct approach: survey residents Indirect approach: examine housing values

Coates and Humphreys (2003) look within cities Find higher property values in immediate neighborhood, but falls off rapidly

DP

Q Games

$Johnson, Groothuis, and Whitehead (2001): “What is the most you would be willing to pay out of your own household budget each year in higher city taxes to keep the Penguins in Pittsburgh?”

Answer: $1.56 $50m over 30 years

Stadium Financing

Taxes Sales Property Income User fees

Debt Delayed taxes?

Lotteries Voluntary tax?

Issues: Revenue potential Efficiency Fairness

Impact of Taxes

Before Tax: P1, Q1

Government imposes tax: supply shifts to St

After Tax: P2, Q2

Tax Revenue = DWL =

Burden of tax Buyers pay part Sellers pay part

D

S

St

Hotel RoomsQ1Q2

P1

P2

$

Per unit tax

P2-t

Issues: Revenue potential Efficiency Fairness

Tax Examples

Miami Proposed sales tax on cruise ship passengers

Cleveland 15-year sin tax on residents of Cuyahoga County

Milwaukee (Miller Park) 5-county sales tax Regressive tax

Seattle Sales tax on restaurants and bars in King County Tax on tickets to games Tax on rental cars

Why Do Cities Do It?

Politicians pursue their own self-interest Special interest groups have their agenda

Highly organized groups have advantage Concentrated benefits and dispersed costs promote

rent seeking

No Team Old Stadium New, No FrillsStadium

New, ElaborateStadium

A B C, D E

Simple majority vote would lead to New, No Frills Stadium

All or nothing choice would lead to New, Elaborate Stadium