INTRODUCTION

This chapter briefly summarizes the most common theories and empirical methods discussed within sports economics. The theories surveyed relate to professional team sports and comprise profit-maximizing models, win-maximizing models and behavioural economics as a newer approach. The empirical methods considered relate to individual and team sports and sports participation. These are divided into the contingent valuation method (CVM) for policy interventions, regression analysis applied to sports participation and natural experiments using difference-in-difference methodology. Various academic articles are used to selectively exhibit these themes.

THEORIES

In line with other businesses, sports teams might be assumed to maximize profits, defined as revenue minus costs. Revenues of sports teams typically comprise gate receipts, income from sales of broadcast rights and commercial revenues such as sales of replica shirts. A convenient assumption is that revenues from broadcast income and commercial income sources are a constant multiplier of gate receipts, although this assumption breaks down if crowds are absent from stadia, as in the period of the Covid-19 pandemic. Leaving aside Covid-19 restrictions, this assumption means analysis can proceed by focusing on gate attendance and gate revenues.

Profit-maximizing models of team sports

The profit-maximizing approach to a model of a professional sports league starts with the attendance demand function for team i:

where Ai is attendance, pi is a uniform ticket price, wi represents team wins and mi denotes market size.

This function then maps into a revenue function:

Wins are determined by amounts of player talent, ti, an inherently abstract and unmeasurable concept but important for analysis. Wins and talents are related through a contest success function:

where tj denotes the talent of all other teams.

Then team i's revenue function can be expressed in terms of talents:

Any team faces a competitively determined unit cost of talent, c, and its total costs are cti.

Profits are then equal to

Each team solves for profit maximization by equating the marginal revenue of talent to the marginal cost of talent, where talent is the team's primary decision variable.