Market Power

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

Friday, January 07, 2005

Big Unit

The Econoclast has some comments on the Yankees' acquisition of the Big Unit, Randy Johnson. He notes that even if the Yankees are losing money on such big-name acquisitions, the team owners may still be making a rational decision because the difference between the marginal costs and the marginal revenues generated by a player may be made up by consumption value received by the owner: the owners gets satisfaction from revenue and from winning.

I'm not sure if I buy the utility maximization argument, especially as an operational hypothesis. I think you can find some owners who are utility maximizers (Steinbrenner comes to mind). You can also find some owners who seem to run teams partly out of a philanthropic interest (Ewing Kaufmann and, perhaps, Glen Taylor, come to mind). But when I think of the accounting chicanery team owners play to hide the profits, the way they play cities off of one another, and all the empirical research with findings consistent with the profit maximizing hypothesis, I think profit maximization is the most reasonable objective to use in an analysis of a professional sports team (and a collegiate athletic department).


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.


Thursday, January 06, 2005

A Scuba Diver's account of the Tsunami

A UC-Berkeley student was scuba diving off the coast of Thailand when the tsunami rolled through. Her experience is detailed here.


Gerard Debreu 1921- 2004

Gerard Debreu died at the age of 83 on New Year's Eve. Here is an obituary of Debreu from the UC Berkley news. Here is an autobiography from


Athletics and Academic Fraud

Speaking of Athletics and Academic fraud (see post immediately below), the National Junior College Athletic Association is very likely to impose sanctions on Barton County Community College for a variety of actions.


Wednesday, January 05, 2005

Football Team Quality and Academic Quality

What is the relationship between athletics and academics on college campuses? Do they compliment one another or do they stand in contrast to one another? Or is there a gray area?

Four years ago, Karl Furstenburg, the Dean of Admissions at Dartmouth, sent a letter to his close personal friend Alfred Bloom. Bloom, the president of Swarthmore College at that time, had made a controversial decision to drop its football program. Furstenburg wrote:

"I am writing to commend you on the decision to eliminate football from your
athletic offerings. Other institutions would do well to follow your lead. I know
you've heard a lot of criticism about this decision but I, for one, support this
change. You are exactly right in asserting that football programs represent a
sacrifice to the academic quality and diversity of entering first-year classes.
This is particularly true at highly selective institutions that aspire to
academic excellence. My experience at both Wesleyan and Dartmouth is consistent
with what you have observed at Swarthmore. I wish this were not true but sadly
football, and the culture that surrounds it, is antithetical to the academic
mission of colleges such as ours. This is really a national problem and it is a
good thing that you are taking leadership on the issue. A close examination of
intercollegiate athletics within the Ivy League would point to other sports in
which the same phenomenon is apparent. In any event, I thought you would be glad
to hear a few words of encouragement on this difficult issue."

Dartmouth is currently looking for a new football coach. In a story in the Valley News,
Furstenburg gives a much different assessment of athletics and academics:
“Intercollegiate athletics are a very significant part of the life here, and
admissions, financial aid and the athletic department work very, very closely together to make this all work within our own values and policies of the Ivy League...”

This, understandably, has created a bit of a firestorm at Dartmouth. This webpage at the Dartmouth News contains statements by Dean Furstenburg as well as Dartmouth President James Wright and Vice President William Walker trying to stem the tide. Dean Furstenburg explains that his letter was written to a close friend who he thought needed a boost in a very difficult time. So which is the real opinion of Dean Furstenburg: the private one or the public one?

Are athletics and academics in opposition to one another? To hear many faculty talk, the answer is yes, but academic research is divided. This paper, completed for the NCAA by Litan, Orszag, and Orszag, doesn't find any statistical relationship between operating expenditures on football and either the SAT scores of incoming students or alumni giving. I haven't read the whole paper, so I can't comment on it. A paper by Robert McCormick and Maurice Tinsley called "Athletics and Academics: A Model of University Contributions" contained in Sportometrics edited by Brian Goff and Robert D. Tollison finds that athletic contributions and contributions to an academic endowment are positively correlated. These results suggest that an increase in athletic donations do not take donations away from the athletic fund. One problem of this study is that the authors used data from Clemson University, so it's difficult to generalize their findings. But you get the idea that a consensus does not yet exist.

I just finished reading Walter Byers' Unsportsmanlike Conduct, a defense of the NCAA written by its first full-time executive director. He writes about Dexter Manley and Kevin Ross of Oklahoma State and Creighton University respectively. Neither knew how to read before or after they left their schools. Ross, Byers writes, had a composite ACT score of 9 and was originally denied admittance, but was let in when the vice president of the school granted him an exception. It's stories such as these that provide anecdotal evidence against athletics.

Later on (page 321) Byers writes:

""Those courses [the soft ones - Byers] are there for a purpose," President
Gail J. Fullerton of San Jose State University told me shortly vefore leaving
office. "The problem occurs when too many athletes get in one course or a
given athlete takes too many of the courses."

"The incongruity seems obvious. The offerings are there to attract
students and tuition dollars. The courses are justified as college-level
work for nonatheltes, but not athletes because, I suppose, they bring with them
too much public scrutiny."

Byers argues that colleges share the blame for allowing these sorts of courses in the first place.

There are so many questions to ask: Can a college compete on the field and also keep high academic standards? Do winning teams generate more contributions to academic funds? Do winning teams generate more applicants and attract better students? Is money spent at the athletic department money not spent on academics? Is a contribution to the athletic department a contribution not given to the school? Does athletic department spending represent a drain of resources from a school? If they do stand in contrast to one another, who does the blame rest on? The list goes on.


Tuesday, January 04, 2005

Economic Freedom Index

The Heritage Foundation has released its 2005 Index of Economic Freedom. This index is based on a theoretical and empirical analysis of the "factors that most influence the institutional setting" that fosters economic growth. I posted a few times on the Pacific Research Institute's Index of Economic Freedom described in this reprint of a Wall Street Journal column. The PRI's index is based on the on the economic factors that are most-highly correlated with migration between the states in the US. The two indices are based upon different foundations, but share similar factors in their make-up.

Here are my previous posts on the PRI's index: 1, 2, 3, 4.

Thanks to Tyler Cowen of Marginal Revolution for the tip.


What's Fair About Fair Trade Coffee?

The Econoclast writes about Fair Trade Coffee here. Although I'm in Caribou Coffee country, I buy from Lakota Coffee (from god's country). If I buy their fair trade coffees, then I'm going to spend about 25 cents more per pound than if I buy their other (not-fair?) trade coffees of similar style. For example, their Colombia Supremo goes for $9.75 per pound via mail order. Their "fair trade organic" Colombia Supremo goes for $10.00 per pound. They claim that the fair trade stuff is softer in the cup. It's tasty, but I don't notice a difference between it and the not-fair trade Colombia Supremo.

If I buy the fair trade stuff, that is a pound of coffee that I didn't buy from the not-fair trade farmers. How is that fair to the not-fair farmers? The additional 25 cents I must spend to get the fair trade stuff represents 25 cents not spent on some other good, perhaps a couple of carmels for my durables (i.e. my two sons), for each pound of coffee purchased. How is that fair to my durables and to the producers of the other goods?

I may not play fair, but I hope I at lease play efficiently.


Playoff? We Don't Need no Stinkin' Playoff!

Mark Blaudschun of the Boston Globe thinks tonight's matchup between USC and (Boomer Sooner) OU is as good as it gets.

Would the powers that be in the NCAA set up the BCS so that there would be a high probability that teams like Utah and Boise State would meet in a BCS national championship game?


Monday, January 03, 2005

What's in a Name?

The Anaheim Angels of Major League Baseball are now called the Los Angeles Angels of Anaheim. Some research suggests that adding a regional identity positively contributes to franchise values in Major League Baseball. Does this renaming constitute a regional identity since Los Angeles, in this case, refers to the metropolitan area? Does the OC feel slighted? Most importantly, how silly is this name change?


Do It Yourself Weather Forecasts

Are you going to Philly for the ASSA convention or to some other January vacation hot spot? You can check out the latest forecasts for precipitation, precipitation type, and the ever-cool 925/850 Mixing Ratio based on several different forecast models. Click here.

Being a former macroeconomic conditions forecaster, I like to read the forecast discussions on some of the regional National Weather Service stations. The NWS forecasters are often just as uncertain about their forecasts as I was of mine - and that's comforting. But they weren't forecasting things for 2 years down the road either!


Animal Sense

Here is a fascinating article in the online version of the Wall Street Journal (subscription required). Apparently, many animals could sense the tsunami coming and took shelter. Here are the first four paragraphs:

"Just minutes before the tsunami crashed into a southern Indian wildlife
sanctuary, a lighthouse lookout reported an unusual sight: a herd of
antelope stampeding from the shoreline toward the safety of a nearby

"The man said he saw the animals on the seafront running away from the coast towards the forests," said A. D. Baruah, a wildlife warden in the state of Tamil Nadu, recounting the story of the desperate flight of the animals as told to him by the startled lookout. "Ten minutes later the waves hit. The animals had run to safety." Added Mr. Baruah: "I'm sure animals have a sense of foreboding -- a sixth sense."

In Sri Lanka, the island nation off India's southern tip, more than 30,000 people were killed. Yet at Yala National Park, just up the coast from where the destruction was most severe, all the elephants, leopards, deer and other wild animals managed to survive the mighty waves, said H.D. Ratnayake, deputy director of the country's wildlife department.

"I haven't seen any effects on the animals," he said. "They all escaped." Asked to explain the survival of the animals, he said: "They had a feeling. Maybe it was the sound waves."