Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, January 07, 2005

Arena Competition within a Metro Area

We often hear about cities competing with one another to lure sports franchises. Teams threaten to move to greener pastures if their current cities don't buck up and provide them with new playgrounds. Teams can do this because, economists reason, their leauges, which control where teams play, keeps the cities that house teams below the number that could profitably support them.

What happens when the suburbs of a metropolitan area build arenas to attract (hopefully) highly-attended events? They won't necessarily compete with the big city's arena for a major sports franchise, but they provide potential competition for other events. The Kansas City Star has this article about this issue.

Last year, voters in Kansas City, Mo. voted to enact taxes on rental cars and hotels to help pay for the construction of a new arena The Sprint Center, in downtown KC. Officials of two suburbs, Olathe and Overland Park, both on the KS side of the metro area, are also trying to get new arenas built. Officials of Overland Park have already received state funding for their project. How do these sorts of arenas do financially?

Across the country, some results are in - and they are mixed. In Omaha, there is the 17,000 seat Qwest Center. Across the Missouri River, in Council Bluffs, Ia, there is the Mid America Center. Before Qwest opened, according to the article, the Mid America Center did well in its first few months of existence (it opened about a year before the Qwest Center opened). But once QWest opened, the events the Mid America Center officials counted on were going across the river and it has lost around $900,000. The Qwest center has some things working in its favor. It lies closer to the population center of Omaha. Council Bluffs is also held in low regard by many on the Nebraska side of the river. The Qwest Center also has a competitive advantage because officials have the ability to make it a more intimate venue simply by hanging curtains in the arena. The Qwest Center might also have some economies of scale associated with it that allow officials to put on events at lower rates.

An arena in St. Charles, Mo. (a suburb of the St. Louis metro area) hasn't turned a surplus yet. An suburban arena in Atlanta seems to be doing better. Omaha and St. Louis are smaller metro areas than Atlanta and the suburban Atlanta arena draws from a larger suburban population base. Kansas City is a smaller metro area than St. Louis.

The lesson for public officals is this: don't get all starry eyed when it comes to deciding whether or not to build a new arena. Take a cold, hard look at the finances and your competition. Can you draw enough events? Can you draw enough people if you bring the events? Can you provide something the big city arenas can't? Can you be cost competitive? Unfortunately, I don't think public officials think this way.