As baseball owners and agents discuss salaries, organization of events and performances, economists watch and analyze the benefits of the event organizers and players. Baseball is a rich field for the study and analysis of basic economic concepts. Baseball outcomes connect economic theory to human behavior in several ways. The performance of a player can be measured and used to analyze how individual employees contribute to the total revenues of the company. In baseball, the relationship between individual performances (input) and winning percentage (output) is highly predictable and directly related. Additionally, the effects of the decisions of Major League Baseball (MLB) managers and event organizers can clearly be illustrated.
In the baseball industry, the game is the product while the players, coaches, the stadium and managers constitute the inputs. Supporters consume the product by attending games, checking box scores in the media or by listening to live broadcasts (Kohl, 2005). The consumption or entertainment value of the game arises from the colorful attire and activities that are carried out in the game, the outstanding personalities in attendance and the uncertainty of outcomes.
The game is constrained by innumerable institutional restraints that include;
- Entry: one cannot freely enter the industry without the consent of the owners of the teams that are already in the industry.
- Movement restrictions: the movement of teams from one location to another is restrained.
The above are constraints that affect the input. However, the output is constrained by factors such as the fixed number of seats in the stadium, a definite number of teams to participate in a particular game and also the certain number of games in a year primarily dictated by fans’ seasonal interests and weather changes (Fizel et al, 1997). MLB’s income is wholly affected by the interrelationship between these factors.
Baseball offers a good illustration of the law of diminishing returns. In the short-run production, a baseball firm has fixed inputs that include 25 players on the roster, 9 starting players and a single stadium (Kohl, 2005). The only variable input is the number of star players. Adding the number of star players increases the team’s chances of winning the game. The chances of winning the game increases at an increasing rate and finally starts decreasing at some point. This is because having more two or three star players in a team raises the quality of the game and the chances of winning (output) increases (Schittich, 2007). However, as more star players are added into the team, the chances of winning continue increasing but at a slightly lower rate. Fixed input limits additional contribution of additional stars hence signing more stars will only be a costly undertaking since both cannot play at the same time (number of inputs is fixed) (David, 2007). Below is an illustration.
For different scales of operation, optimal baseball management decisions require the balancing of costs against revenues generated. Revenue is generated by selling of royalty rights, concession fees such as parking and selling of broadcast rights. The biggest cost is the salaries and benefits of support staff and players. Decision-making involves a trade-off hence the management should be keen when formulating and implementing any policy (Kohl, 2005). For instance, trading cards can be produced by as many suppliers as possible. However, market demand and supply dictates its price and output. The market demand for tickets rises with the increase in per capita in the metropolitan area, market size and an increase in the team’s winning percentage. Additionally, as the number of hobbyists and collectors grow the market demand for collective trading cards rises. This is because more stakeholders regard the cards as a substitute for stock market.
The demand in the baseball industry is elastic. If the price of tickets increases by $1, annual attendance reduces by 201,000 (Kohl, 2005). The elasticity is negative suggesting that in the short-run ticket owners might have increased their revenues by raising the prices of the tickets.
Competition in the industry also affects the price of tickets. When many companies provide the tickets, fans pay less to obtain the tickets hence more of them attend the games. They will have to sell the tickets at a competitive price so as to win customers (Sichel & Eckstein, 1974). Additionally, if it were only a single firm (monopoly) selling the tickets, it would have fixed very hire prices since it has an assurance that the fans (consumers) will still buy them. Anti-trust laws try to fight monopolism so as to alleviate the devastating effects that monopolies have on the market conditions.
The marginal revenue product of different MLB players can be estimated. Players’ performances determine the victories of MLB which is in turn related to the attendance which determines revenues (Fizel et al, 1997). The players should be paid according to their performances so that the team does not undergo additional costs. At times, MLB finds it necessary not to sign the best players who would have increased their chances of winning because such players require more resources to sign. This compromises the teams winning chances and constitutes an opportunity cost.
As elucidated above, baseball can comfortably be used to illustrate various economic concepts. These concepts include competition, scarcity and choice, opportunity cost and the relationship between inputs and outputs.
References
David, F. (2007). The Baseball Economist: The Real Game Exposed - The Region - Publications & Papers | The Federal Reserve Bank of Minneapolis. Retrieved January 27, 2014, from http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3178
Fizel, J., Gustafson, E., & Hadley, L. (1996). Baseball economics: Current research. Westport, Conn: Praeger.
Kohl, A. M. (2005). Baseball and economics.
Schittich, C. (2007). Cost-effective building: Economic concepts and constructions. München: Edition Detail, Institut für internationale Architektur-Dokumentation.
Sichel, W., & Eckstein, P. (1974). Basic economic concepts: Microeconomics. Chicago: Rand McNally College.
