DRI-300 for week of 5-25-14: The Key Figure in the Evolution of Economics in Sports: Bill Veeck, Jr.

An Access Advertising EconBrief:

The Key Figure in the Evolution of Economics in Sports: Bill Veeck, Jr.

Last week, we overturned the conventional thinking on sports and economics by showing key examples of the economic principles guiding the business operation of baseball teams in baseball’s first century of operation. Now we come to a watershed in the economic history of sports – the career of Bill Veeck, Jr. This self-described hustler took the economics of baseball business to a higher level. His life altered the course of baseball and sports in America irrevocably.

The Career of Bill Veeck

William Veeck, Sr., was a Chicago sportswriter who expressed his opinions about the management of the Chicago Cubs forcefully in his newspaper column. Cubs’ owner William Wrigley, Jr., took Veeck, Sr., at his word and offered him the title of team president. Bill, Jr. spent his boyhood at the ballpark as popcorn vendor and clubhouse boy. It is said that 13-year-old Bill originated the plan to plant ivy on the walls of Wrigley Field. Upon William’s death in 1933, Bill left KenyonCollege and took over the position of Treasurer.

In 1942, Bill and former Cubs player Charley Grimm scraped up and borrowed money to buy the minor-league Milwaukee Brewers. Milwaukee was the laboratory in which Veeck developed and tested his theories for owning and running a baseball team. Later, these were applied in absentia by Grimm and others. Veeck joined the Army during World War II and spent the war in Europe as part of an artillery battalion. A recoiling artillery piece crushed his leg, necessitating the amputation of first his foot, then the leg above the knee. Ultimately, Veeck would undergo 36 operations on the leg. He was fitted for a wooden leg, which he equipped with a hold that served as an ashtray for his ever-present cigarette.

Veeck never paused to cry over his misfortune. In 1946, he got up an owner’s group using innovative financial arrangements and purchased the Cleveland Indians major-league franchise. The Indians had mostly occupied the second division of the American League since their World Series championship in 1920. They divided their games between tiny LeaguePark (capacity under 20,000 people) and (on Sundays and special occasions) spacious Municipal Stadium (capacity: 78,000+).

Veeck made Municipal Stadium the team’s permanent home, thereby tripling the team’s revenue potential at a stroke. Of course, he then had to fill all the empty seats surrounding the team sitting in the dugout, so Veeck applied the razzle-dazzle marketing techniques he had pioneered in Milwaukee. Cleveland’s attendance rose to 1.4 million in 1946 and 1.6 million in 1947. Veeck also established a permanent radio broadcast for all of Cleveland’s games, both home and on the road. The rights to broadcast those games gave him another source of revenue.

In 1947, Veeck broke the color line in the American League by acquiring power-hitting black outfielder Larry Doby. In 1948, Veeck defied the advice of baseball experts by buying the contract of the premier pitcher in the Negro Leagues since the 1920s, Satchel Paige. Paige’s reputed age was 42, making him probably the oldest rookie in major-league baseball history. He has already overcome serious arm trouble and was universally considered to be well beyond his most productive years as a pitcher. But Veeck added him to a staff that already included Bob Feller, Bob Lemon and Gene Bearden. Paige made a valuable contribution as a spot starting pitcher and reliever and the Indians’ pitching staff was the best in baseball that year. Veeck had earlier announced the trade of player-manager Lou Boudreau to the St. Louis Browns. The fans protested the trade of the popular Boudreau so strenuously that Veeck reversed his earlier decision and instead gave Boudreau a two-year contract. Boudreau reacted by hitting .355, winning the American League’s Most Valuable Player award. He led the Indians to their first pennant in 28 years. (Cleveland tied the Boston Red Sox during the regular season and won a single-game playoff, 8-3, with Bearden pitching and Boudreau hitting two home runs.) In the World Series, Cleveland triumphed in six games.

For the season, the Indians attracted 2.6 million fans, which stood as a major-league attendance record for 14 years. Even today, almost 70 years later in a country whose population has nearly doubled since then, this would be excellent attendance. In 1948, night baseball games has been around for only a decade and Veeck’s achievement began the transformation of baseball into the country’s leading family pastime. 1948 was the apex of Bill Veeck’s career as a baseball-team owner.

Veeck did not stick around Cleveland long enough to reap extensive rewards from his astuteness. In order to pay the freight on a divorce in 1950, Veeck sold his interest in the team. The next year, he bought the worst team in baseball, the St. Louis Browns. Veeck set out to improve the team’s financial fortunes by doing something that major-league baseball ownership frowned on – competing economically with the other major-league franchise in town, the powerful St. Louis Cardinals.

Veeck’s high-powered marketing efforts included hiring a midget, three-foot eight-inch-tall Eddie Gaedel, to appear in an official game. (Gaedel drew a walk in his only plate appearance.) Another notable Veeck promotion was “Grandstand Managers’ Day.” The Browns’ manager took the day off while a team employee held up placards holding strategic actions such as “Bunt,” “Take,” “Squeeze,” “Hit and Run,” etc. The fans’ applause was the selecting factor in choosing among strategies. (The Browns won, 5-3.) Veeck succeeded in upgrading both the team and attendance, but was unsuccessful in running the Cardinals out of town. He sold the Browns in 1952 and made an abortive attempt to acquire the Philadelphia Athletics before taking a sabbatical from the game for several years.

In 1959, Veeck put together another innovative financial package to acquire a majority interest in the Chicago White Sox from its longtime owners, the Comiskey family. Here his business and financial innovation peaked. Once more, a Veeck team broke attendance records as White Sox attendance reached a historic high of 1.4 million, rising to 1.6 million the following year. Once more, Veeck put a pennant-winning team on the field, as the White Sox bested the powerful Yankees during the regular season before succumbing to the Los Angeles Dodgers in the World Series.

And once more, Veeck couldn’t stand prosperity. He sold the White Sox in 1961 and left baseball, taking over ownership of Suffolk Downs racetrack. He wrote the first of three books, a bestseller entitled Veeck As In Wreck, in which he outlined his personal philosophy of business and life (he described himself as a “hustler”) and criticized the owners and administrators of major-league baseball for their lack of innovation, disregard of fan well-being and unwillingness to contemplate change. At the end of the book, he predicted his return to baseball.

That prediction was fulfilled in 1975 with his re-purchase of the White Sox. This came at the precise moment when the advent of player free agency was changing the game in ways Veeck himself had supported; he, fellow owner and former player Hank Greenburg and future Hall of Fame player Jackie Robinson were the only three people in the industry to testify in favor of free agency. Ironically, it doomed Veeck’s tenure as owner since he was poorly placed to compete for the best baseball talent with major-league baseball’s richest owners.

Veeck’s marketing and management methods enjoyed some success in this, his last hurrah as a baseball owner, but not enough to earn him the riches we have come to associate with sports ownership. Once again, he sold out after a few years and spent his declining years in Chicago as a Cubs fan. He died of lung cancer in 1986.

In 1991, Bill Veeck became one of a few owners elected to baseball’s Hall of Fame. Two sets of innovations accounted for this salute. The better-known are the long list of tactics and gimmicks that changed the practice of sports marketing forever. Less well known but even more significant are the financial innovations introduced by Bill Veeck.

Bill Veeck’s Marketing Innovations

Beginning with his first venture as a baseball-team owner, the minor-league Milwaukee Brewers, Bill Veeck unloaded a torrent of marketing measures on his fans. Rather than viewing these as mere tactics, we should regard them as a coherent overall strategy. Prior to Veeck, baseball owners would unveil the occasional marketing gimmick, usually designed to profit from a special occasion or circumstance. But Veeck had a consistent, discernible method behind the marketing madness that became his trademark. He followed a two-pronged plan: (1) Turn the baseball fans within his geographic area into regular, hard-core customers; and (2) Mold baseball’s public image into that of a family pastime analogous to the role then occupied by the motion picture.

In order to accomplish these twin objectives, Veeck needed to achieve several subordinate objectives. The first of these was to get fans out to the ballpark. Veeck was not a rich man; in order to gain ownership of a baseball team, he needed to do it on the cheap. This required not only that he enlist co-owners but also that they go after less successful teams available at low prices. This meant that Veeck was always working out of a hole, having to build up a fan base from scratch. If ever there was a man for that job, he was the one.

In Milwaukee, Veeck perfected the concept of the gimmick giveaway. In order to promote baseball to families, Veeck faced the problem of attracting women to what had previously been a male pastime. He approached the issue aggressively by offering orchids to all women who attended the game on Orchid Night. During World War II, scarcity and rationing were the order of the day, so Veeck offered nylon stockings to female fans. A lucky fan won three pigeons at a subsequent Brewers game; another later won a 200-lb. cake of ice. (This took place prior to home refrigeration.) Later in the season, a fan was the beneficiary of a horse.

Weddings and birthdays are venerable special-occasion opportunities for businesses, but Veeck took this concept to new heights (or, some sniffed, depths). He staged weddings at home plate. On Manager Charley Grimm’s birthday, he sent a cake from which emerged a badly needed left-handed pitcher.

Today, ballparks offer a veritable international buffet of food choices. But prior to Bill Veeck, the “peanuts and Cracker Jack” of the song “Take Me Out to the Ball Game” comprehensively summarized the menu choices open to the fans. Veeck began the transition toward a wide range of snacks by introducing hot dogs, hamburgers and beer.

By the time Veeck arrived in Cleveland, he had learned how to attract fans. Now he had to master the art of keeping them. The most characteristic and revealing of all Bill Veeck’s marketing measures was Fan Appreciation Night. Veeck considered himself at one with his fans. He responded to critics who claimed his actions were in bad taste by claiming that his tastes were aligned with those of his fans – what appealed to him would also appeal to them. Veeck encouraged fans to bring their families to the ballpark by subtly suggesting that Indians fans were part of one great big extended family, with himself as patriarch.

Veeck came to Chicago after spending a few years away from the game. With his emotional and creative batteries recharged, Veeck unleashed a succession of new innovations that continued to revolutionize baseball marketing. The White Sox were the first team to print player names on the back of their home uniforms, a practice now followed by almost all major-league teams. Veeck provided fireworks displays on special occasions like July 4th. He also considered a White Sox home run a special occasion, because he pioneered the exploding scoreboard, which detonated an explosive firework when a home-team player cleared the fences. (In retaliation, Yankees’ manager Casey Stengel had his players light sparklers and parade outside the visitors’ dugout when Mickey Mantle homered against the Sox.) Actually, Veeck had a point because the White Sox won games with pitching, defense and base running; their power-hitting was the worst in the American League. More prosaically, Veeck also introduced electronic scoreboards to replace manually manipulated ones.

The second round of Veeck’s doubleheader as White Sox owner was his last hurrah as an owner. His health and stamina were waning, but he still found the energy to stage a Bicentennial Day at the park in 1976 and personally play the role of the peg-legged fifer in a Revolutionary War tableau. He added more innovations that have since become standard in the major leagues, such as a box containing fresh baseballs rising from underground behind home plate to replenish the umpire’s supply; and an electric blower to blow dirt off home plate. Veeck twice reactivated veteran coach Minnie Minoso long enough to allow the 50-plus Minoso to become the first ballplayer to play during five different decades.

Bill Veeck’s Financial Innovations

Bill Veeck was the greatest marketing genius in the history of American sports. Yet his financial innovations had an even greater impact on the sports and daily lives of Americans.

Veeck turned the Milwaukee Brewers into a successful minor-league franchise that won three America Association pennants in five years. He booked a $275,000 profit on his sale of the team and returned after World War II with this stake. But in order to afford a major-league franchise, Veeck still had to employ creative finance.

Veeck formed a common-stock debenture partnership to buy the Cleveland Indians. Each member put up a comparatively modest share of financial capital. The remainder of the purchase price was borrowed; the borrowing formed the debenture. The team itself was the lender, so that the partners could take (otherwise taxable) income from the team in the form of (non-taxable) repayment of the loans. This combination of leverage and tax avoidance greatly increased the return on investment. As economist James Quirk documented exhaustively, sports had heretofore offered rather mediocre rates of return, particularly for small- and middle-market-sized franchises. Veeck’s technique supplied part of the pattern for future franchise ownership: leverage and tax avoidance within a corporate framework.

In 1959, Bill Veeck supplied the lever that turned the world of professional sports on its axis. He reasoned that professional athletes are an asset to team owners in the same way as are (say) plant and equipment are to other business owners. Their physical talents and abilities deteriorate over time in the same way as machines wear out. So why shouldn’t team owners be able to claim a depreciation allowance on players as business owners do on capital assets? Of course, owners don’t own players in the same way as businesses do plant and equipment; it is the contracts (or, more precisely, contractual right to services) that the team owners own. But the principle is the same… isn’t it?

Veeck convinced the Internal Revenue Service that it was. This paved the way for what is now known as the “Roster Depreciation Allowance.” Upon purchase of a sports team, the purchaser can deduct the full purchase price as a business expense – under the heading of depreciation – over a 15-year period. Owners commonly keep two sets of books, one for business purposes that omits the deduction and one for public and IRS inspection including the deduction. It is interesting to note that, while businesses usually strive to turn the best possible profit-face toward the public, sports businesses are now so dependent on public subsidies that they minimize the public perception of their profit to exaggerate their need for the subsidies.

As students of economics, what do we make of the Roster Depreciation Allowance and Bill Veeck’s financial impact on professional sports? There is no doubt that player abilities do depreciate over time. Insofar as human capital is analogous to non-human capital, this means that we can conceptually assign a role to player depreciation in baseball and in sports generally.

The operative word in the previous sentence is “conceptually.” In practice, there is no perfect formula for calculating depreciation in business generally because no system of real-world cost accounting can correspond to the theoretically correct economic conception of “cost.” That caveat goes double – or triple or quadruple – when applied to player depreciation. A sports team consists of players whose abilities are declining – along with other players whose abilities are increasing. The rates of increase and decrease vary for each player. There is no way to “mark to market” all these changes in any objective way; we cannot even attempt such a task without spending inordinate amounts of time and money. So, instead, we use a great big blunt instrument like the “Roster Depreciation Allowance” and pretend that we are solving the problem. But have we made things better than they would be without any depreciation allowance at all – or worse? A priori, we cannot even know.

The ideal solution would be to simply allow businesses that prefer the depreciation accounting tool to use it. If they prosper, it must be because that form of accounting improves their operations on net balance. If not, the accounting method will fall into disuse. Alas, that is not what happens. Depreciation allowances like the Roster Depreciation Allowance are used in order to legally avoid taxes. And this is the clue to the solution to the problem.

The political left wing angrily claims that sports-team owners are avoiding taxes that the rest of us are somehow paying. The right wing claims that more and more lavish depreciation allowances will usher in more productivity and prosperity. Both sides are missing the point. The problem is not depreciation per se. The problem is taxes. Because both left and right now support big government, both take taxation for granted. Framing the issue in terms of an age-old punchline, both sides agree on what government is and are now arguing only about the price. Yet if taxation did not exist, the motivation for employing any uneconomic form of depreciation would be absent.

Bill Veeck could be said to have ushered in the modern era of public subsidies for sports teams, even though he would undoubtedly have thoroughly disapproved of those subsidies. His impact was not only accidental but also superficial, as we just showed. Somehow, it seems not only ironic but also fitting that Veeck himself apparently did not benefit from IRS approval of the Roster Depreciation Allowance. In order to qualify for it, 80% ownership in the team was a necessary precondition. Veeck himself advertised his 54% stake in the White Sox, going so far as to invite reporters to enjoy “54% of a cup of coffee” with him. Veeck was hugely unpopular with his fellow owners, never more than with Charles Comiskey of the White Sox, whose family had owned the team since the 19th century before Veeck’s group acquired a majority interest. Comiskey refused to allow Veeck to obtain the additional shares necessary to qualify for the tax benefit.

Using Economics to Improve the Team on the Field: the Last Link in the Chain

In baseball’s first century, team owners routinely used economic logic in the operation of the business end of baseball, which in turn often affected the performance of the team on the field. Since team performance is the most important element representing the “product” that fans buy when they support a sports franchise, fans were affected by the actions of team owners. Usually, these effects were adverse. This was true even though the interests of team owners and fans were ultimately aligned by the principle of voluntary exchange; if the owner’s product does not please fans, they will reject it and the owner will go broke.

Bill Veeck recognized the alignment of interests between fan and owner. He sought to serve the interests of the fan while serving his own. He strove to increase the quality of the produce fans received in every conceivable way by concentrating particularly on the non-performance aspects of the sports experience. He gave the fans numerous kinds of “fringe benefits” associated with game attendance. He made attendance a family oriented, family-friendly experience. He created a psychological bond between team and fans. He did all these things while increasing his stadium capacities, creating radio broadcast rights as a revenue source and using leverage and tax avoidance to improve his rate of return on investment.

That does not mean that Veeck ignored the necessity of putting a winning team on the field. Quite the contrary; Veeck’s teams always improved competitive performance markedly. The Milwaukee Brewers won three league pennants during his ownership. The Cleveland Indians won their first World Series Championship in 28 years within three years of his arrival. The Chicago White Sox won their first America League pennant in 40 years in his first year of ownership. Even the hapless St. Louis Browns improved their play under his stewardship.

Veeck was a student of baseball. He was not a slave to traditional methods and was perfectly willing to admit mistakes and change course when circumstances seemed to dictate it. In certain areas, his operations were a forerunner of today’s economic theory of baseball. But it cannot be said that Bill Veeck cracked the code of applying economic logic to the problem of improving team performance on the field.

From a purely business standpoint, this was his only failure as a baseball-team owner. Considering the magnitude of his achievements, we can hardly hold this limited failure against him. It was over a decade after his death when that code finally was cracked and economics finally assumed its full and rightful status in the field of professional sports. That episode will constitute the final installment in our ongoing history.

DRI-326 for week of 3-31-13: The Kansas City Star Meets Flexible Baseball-Ticket Pricing

An Access Advertising EconBrief:

The Kansas City Star Meets Flexible Baseball-Ticket Pricing

Economics is the formal logic of human choice. Newspapers report human affairs. Reporting the news affords endless scope for economics as a tool of explanation and analysis. Yet newspapers are notorious for their ignorance and mishandling of economics. Why?

One possible answer is deliberate misrepresentation and concealment of facts by the papers for ideological reasons. Another is simple error. The latter hearkens to the old maxim, “Never ascribe to venality that which can be explained by mere stupidity.”

Whatever the cause, examples of this phenomenon abound. A recent front page of the Kansas City Star offers fresh evidence of it. The subject is the pricing of baseball tickets by the Kansas City Royals.

Major-League Baseball Meets “Dynamic Pricing”

“Get Set for Big Swings,” shouted the front-page headline of the Star on Sunday, March 31, 2013. An overhead explained: “Royals Ticket Prices: Like airfares and hotel rates, they will fluctuate.” The subhead continued with: “Dynamic pricing, a fixture in the travel industry and growing more common in the entertainment world, has come to Kauffman Stadium. Below are prices for the same outfield seat to see the Royals in their first week at home – as of now.” The graphic chart showed a $54 price for the sold-out home opener on April 8, followed by prices ranging from $23 to $31 to the identical seat for subsequent games that week.

The article underneath, written by veteran staffer Mike Hendricks, contrasts the age-old procedure of fixed seasonal pricing for Kansas City Royals’ baseball games with its successor. So-called “dynamic pricing” is familiar to contemporary shoppers for airline and hotel reservations. Prices can fluctuate from day to day instead of from one season to another. Moreover, these daily fluctuations are not uni-directional; they will move up and down. That is something new for baseball fans – for decades, the only changes in official ticket prices have been upward ratchets from one season to the next.

Economists will immediately recognize that the term “dynamic pricing” is a misnomer – probably owing to (bad) advertising psychology. The precise descriptive term is “flexible pricing.” It implies the actual state of affairs, in which prices are responsive to changes in consumer demand. Failure to recognize and report this misnomer is the first of many depredations committed by the author of this piece.

The headline – “Get Set for Big Swings” – embodies a longtime Kansas City Star tradition: promising revelations that the accompanying article does not deliver. This constitutes lying to the reader. It is reasonable to suppose that Star readers resent being lied to and that this has contributed to the precipitous declines in the paper’s circulation and consequent ad revenue. The only “big swing” in price cited in the article occurs between opening day and succeeding games. One of the safest predictions about any Royals season is that the opening-day game will sell out and that attendance will immediately plummet thereafter. Given flexible pricing, it is therefore axiomatic that opening day will command a high price and that the price will thereupon fall. Maybe there will be “big swings” later in the season, maybe not. But the author doesn’t say that and offers no evidence that it will happen.

By any reasonable standard of journalism, this article is off to a miserable start.

Flexible Pricing of Baseball Tickets

The author’s vagueness on future price fluctuations is not surprising because his grasp of the basis for pricing is demonstrably shaky. Although the phrase “supply and demand” appears once in the article, its underlying logic is left to the reader’s imagination.

The importance of consumer demand to pricing is never mentioned, let alone explained. In this case, the supply of tickets is fixed – limited by the seating capacity of Kauffman Stadium. Thus, the economic logic of baseball ticket pricing comes straight out of the textbook diagram marked “Very Short Run,” in which the supply curve is a vertical line and price is completely determined by its intersection with the downward-sloping demand curve. In the very short run, economists teach, price is “demand-determined.”

Thus, price changes are caused by changes in demand. These are given very short shrift indeed by the author. His marquee explanation for the Royals’ new pricing strategy is that “the hotel and airline industries have used variable pricing strategies for years as a way to encourage customers to make their reservations early.” It is true that hotels and airlines do have one thing in common with baseball teams; namely, a fixed capacity (seating or lodging) that offers the constant incentive to keep capacity utilization as high as possible.

Hotels and airlines, though, commonly suffer the peak-load problem. Their capacity is insufficient to handle demand at its very highest point(s), but too great to utilize efficiently much – perhaps most – of the time. Since the late 1980s, the Royals have suffered from inadequate capacity about one day each season – opening day. In recent years, they have had a hard time giving away tickets to late-season games – and that is not hyperbole. In any case, baseball teams simply do not suffer the kind of scheduling problems endemic to the airline and hotel industries. Business travelers or vacationers on strict timetables are key components of airline and hotel demand, but much less important to baseball teams. Even allowing for the Royals’ atypical status as a regional franchise, buying weeks or months in advance usually provides little value to fans and little convenience to the team.

Why Now? The Timing of the Shift to Flexible Pricing

Mel Brooks’ famous protagonist Maxwell Smart on the classic TV series Get Smart once responded to a villain’s derisive defense “You’re not going to try to convict me on that flimsy evidence, are you?” with the rejoinder “No, I’ve got some more flimsy evidence.” Similarly, the author buttresses his non-explanation of Royals’ ticket pricing with more flimsy evidence. “Of all professional sports, major-league baseball teams have the greatest challenge in selling tickets, given the number of seats [and] games played,” gravely declares a “market analyst” employed by a ticket reseller.

But when baseball was truly America’s national pastime, its long season and big edge in games played was not viewed as a disadvantage. On the contrary, it was cited as a+ leading factor in the economic advantage enjoyed by baseball. Pro football, basketball and hockey were second- and third-string sports, miles behind baseball in income and prestige. Owners envied baseball its long season, which provided a tremendous opportunity to generate revenue. Baseball’s only rival as a leisure-time activity was the movies, which were probably the true national pastime.

No, the long baseball season is only a drawback when the team is a poor attraction. 1985 marked the Royals’ last post-season playoff appearance – they won the World Series by overcoming 3-1 deficits in both post-season playoffs – and they have threatened to return only in 1989, 1994 and 2003. They are the deadbeats of major-league baseball. Their 27-year absence from the playoffs is by far the longest of any team in North American professional sports.

Of course, this begs the question of why the Royals have chosen to introduce flexible pricing now, at this particular point in their history. As it turns out, it is not pure happenstance. Flexible pricing is one of various types of pricing alternatives to single pricing. The common feature behind all these is motivation – the seller’s desire to increase total revenue and profit by charging multiple prices rather than just one.

That motivation stems from more than merely the desire to profit from multipart pricing. Conditions have to be right in order for the alternative scheme to work. The different prices must be designed to gain from differing characteristics of different buyers or different conditions existing among the same buyers at different times. Either way, the firm must have the ability not only to identify the differences but to act upon them. When it does that, it is engaging in price discrimination.

Baseball teams already strive to segment different groups of buyers and charge them different prices to watch the same baseball game. That is the purpose behind different seat categories such as general admission, reserve seats, box seats, field level, upper level, stadium boxes and luxury suites. Each seat category is geared to a different category of buyer and priced accordingly. The general admission tickets are geared toward low-income fans and students. Outfield general admission is the farthest away from the action and is also geared toward the low-income fans who might otherwise not attend games if not for the affordability of a low price. Luxury suites are reserved for corporate clients and millionaires who can afford to plunk down five figures to reserve a season ticket in relative luxury. Box and reserve seats are targeted toward upper-middle-class fans that want a good seat and can afford to pay a price slightly above general admission.

This system has long been in effect in baseball and other sports. It is familiar throughout the entertainment industry. The Star article cites the symphony – an art form whose legendary disdain for solvency seemingly places it above the vulgar domain of commerce and profit. Yet the time-honored seating divisions separating dress circle, orchestra, ground floor, loge or mezzanine and balcony represent the same price-discrimination segmentation of demand practiced by sporting events.

Flexible pricing takes the idea of differential demand in a different direction. Rather than focusing on demand differences among consumers at the same point in time, it considers fluctuations in demand that affect all categories of buyers – but at different points in time. For example, instead of targeting different groups of buyers, segmented by income, it targets different games that support a higher price. These are late-season games when pennant races and individual honors such as batting championships and pitching titles are at stake. These games should command premium prices, as long as the team can stand up under pressure. For over two decades, the Royals did not play such games because they were never in contention that late in the season. Consequently, there was little purpose in setting up flexible pricing because the team would not benefit that much from flexibility. There was little additional pricing strategy the Royals could use to enhance their revenue; all they could do was get what little they could from the standard price-discrimination techniques. The introduction of inter-league play did briefly inject some novelty into the schedule, particularly by adding an interstate rivalry with the St. Louis Cardinals, the Royals’ 1985 World Series opponent. This allowed the team to give flexible pricing a tryout last year in Cardinals’ games.

But prior to the 2013 season, the Royals beefed up their pitching staff. They acquired ace starter James Shields and starter/reliever Wade Davis from the Toronto Blue Jays and starter Ervin Santana in another trade. This transformed the league’s worst pitching staff into a potentially serviceable one while retaining their current offensive strength, spearheaded by all-star Billy Butler and Alex Gordon. Shields is currently pictured on Sports Illustrated’s cover, highlighting the magazine’s baseball pre-season issue. For the first time in years, the team seems able to contend for a playoff berth.

At lastthere is a prospect that late-season games may be competitively meaningful. Opening day may not be the only sellout game on the schedule this year. Thus, an effort to milk more box-office revenue from those games makes sense, since there is more potential revenue to seek.

In theory, flexible pricing benefits teams whenever there are substantial fluctuations in demand from game to game. Various factors other than competitive performance might influence the amplitude of demand over the course of a season. Weather is the most obvious; Kansas City is subject to cool Springs, hot Summers and brisk Falls. A spate of unseasonably bad weather might give the team a chance to head off bad attendance by offering offsetting discounts to fans. Games for which announced starting pitchers are marquee players will generate stronger demand.

But these subsidiary factors will become more important when core demand for tickets is strong. The improvement in the Royals’ competitive position was clearly the driving factor in the team’s change in pricing policy.

Baseball, Politics and the Star

One would suppose that an above-the-fold, front-page article would command the full attention and premium resources of a metropolitan newspaper. Yet none of the real considerations found their way into the Star‘s story on the Royals’ ticket-pricing change. Aside from simple incompetence, how can we explain this?

The Star is a left-wing newspaper. That encompasses more than merely a capsule summary of its editorial stance. Ideology infects every aspect of the newspaper’s operations, from coverage to reporting to editorials to op-eds to advertising. It permeates not only the editorial page but the front page as well. It infiltrates the sports pages, the entertainment section and even the comics. It also affects how the paper treats the Royals.

Sports teams have grown accustomed to public subsidies. These take various forms. Most commonly, they include stadia built and maintained at taxpayer expense – including periodic repairs, refurbishment and reconstruction. That does not mean there are not quid pro quo, though. It is tacitly understood that the team and its employees are to back the multifarious public projects launched by the local political establishment with endorsements and campaign cash.

The newspaper, as the establishment’s informal public-relations and promotion agency, treats the Royals with due deference. The team is viewed as a kind of quasi-public utility – an economic and psychological necessity that is not so much too big to fail as too important to fail. The newspaper sees the team’s economic interactions as gifted with remarkable generative powers – multiplier effects and such – that are really beyond the reach of any mortal business firm. But the Royals have a tacit left-wing seal of approval, which means that they are assumed to be above such vulgar considerations as profit. That is why the economic rationale for flexible and multipart pricing never reaches the tender ears of Star readers.

To the Star, the Royals are not so much a sports franchise as a political franchise and ideological asset. No information potentially damaging or embarrassing to that franchise – no matter how newsworthy – will pass unfiltered through the Star to the general public.

How has the new pricing regime been received by fans? “So far there hasn’t been much of an outcry here or anywhere else.” (21 of the 30 major-league baseball teams have now adopted some form of flexible pricing, the article discloses.) Why not? Again, the article’s author’s lips are sealed on this matter. But the answer is clear. The rise of ticket brokers and a legal secondary market for tickets, cultivated by firms like Stub Hub, has prepared the ground for flexible pricing. In other words, the free market is way ahead of Royals’ management. The author, a faithful Star minion, holds no brief for freedom or free markets and saw no reason to enlighten readers on this point.

The Economics of Flexible Ticket Pricing

The point of the Star‘s story is obscure. The headline promises “big swings” in ticket prices, but the article doesn’t provide any, nor does it suggest any real basis for them. It seems clear that something pretty new and different has come to baseball ticket pricing in particular and to professional sports in general, but the author either doesn’t know what it is or doesn’t want to reveal it. At this point, it is necessary for economic logic to take the tiller of the story in order to bring us to a coherent destination.

Will flexible pricing produce higher or lower prices than the old seasonally fixed pricing method? The short answer is: Both. But that’s not a satisfactory answer. The precise answer is that price will be closely attuned to demand on a game-by-game basis, rather than a yearly basis. (We should bear in mind that there are as many separate “demands” as there are ticket categories – that was true under the old system and remains so under flexible pricing.) From a fundamental economic perspective, that is a good thing.

The article is woefully ambiguous on this point. It first informs us (correctly) that “the prices…will fluctuate day to day, and across all sections based on supply and demand.” (This is the article’s only reference to supply and demand.) It then continues by revealing that “fewer than half the seats in your average ballpark are occupied by fans who have bought season tickets,” thereby setting a “challenge for baseball clubs…to attract casual fans who want to see a game or two during the year.” And “free bobbleheads and ‘buck nights’ only go so far in building attendance numbers.” So far, so good – flexible pricing’s raison d’être is improving ballpark-capacity utilization.

Sure enough, a company called Qcue, headed by entrepreneur Barry Kahn, sold the San Francisco Giants on the concept of flexible pricing on a trial basis in 2009. It yielded a 20% increase in sales of the seats in sections picked for the trial. Today, the company works with two-thirds of major-league clubs and has achieved revenue increases of between 5% and 30%. “That’s ticket-revenue dollars, not an increase in the number of tickets sold. However, that tends to go up, too. Dynamic pricing doesn’t necessarily make it more affordable to attend a ball game than before, but it can.”

This burbling incoherence is typical Star analysis. If attendance is increasing across the board and the only thing that’s changed is prices charged, then the prices must be falling on net balance. That’s the Law of Demand at work. The questions are: What makes them fall? When do they fall? Do they ever rise? When is the best time to buy? And – the $64,000 question – is flexible pricing a good thing overall for baseball fans and for the rest of us?

The article implies that midweek games will carry a lower price tag. It is certainly true that, all other things equal, the demand is greater on weekends when kids and working parents are less encumbered by obligation. But that is a comparatively minor factor in segmenting demand.

High-demand games are special occasions – opening day, marquee players or teams appearing – and pennant-race games. A computer algorithm will alert team officials to opportunities for price increases, which will be implemented electively. It is these games in which Royals’ sales director Steve Shiffman’s advice to “buy early, save money” makes sense. Not only will buying early get the best price, it will also avert the possibility of a shutout; e.g., failure to “score” a ticket at all due to unavailability.

The rest of the time, buying early benefits the team, not the fan. A baseball ticket, like a stock option airline seat or radio advertising time, is a wasting asset whose value expires when the game’s first pitch is thrown. (More precisely, it plummets dramatically, expiring completely at about the fourth or fifth inning.) As game time nears, the holder will likely accept successively lower prices rather than see it expire unused. This is particularly true of sports teams, who have a vested interested in filling seats to increase the incomes of concessionaires. The rise of ticket brokers has complicated pricing for team management, who are extremely reluctant to stimulate price wars lowering seat prices too much. Thus, the Royals advertise the season-ticket-holder’s discounted single-game price as their rock-bottom price. But from the fan’s standpoint, there is no point in transacting before this price is offered and no reason to rush once it is in place – for garden-variety, low-demand games.

Thus, the brave new world of flexible baseball-ticket pricing does demand that fans distinguish between high-demand and low-demand games, in order to get the best price. But this should not tax the capabilities of any experienced fan or intelligent non-fan. As a practical matter, it will not severely disadvantage even the most incapable consumer until and unless the Royals become contenders.

Is flexible pricing economically efficient? Flexible pricing brings the number of tickets fans wish to purchase in each seat category closet to equality with the number available, using price as the coordinating mechanism. This is another way of saying that the amount of alternative consumption fans are willing to sacrifice to get a ticket (their demand for it) is closer to the amount they have to sacrifice (determined by the ticket price). Equality between those two things constitutes the famous economic condition called “equality at the margin.” It is one good way of defining economic efficiency. Thus, the verdict on flexible pricing and economic efficiency is favorable.

This is good for everybody because we all have a stake in using what we have to make each other as well off as possible. It’s good for taxpayers because baseball is publicly subsidized, but the presence of subsidies doesn’t make the case stronger. In fact, the subsidies themselves are inefficient and should be ended – that would make things even better. (Sports meet none of the textbook criteria for subsidy and none of the claims to economic exceptionalism advanced in their behalf.)

If prices sometimes go down but sometimes go up, how can we claim that fans, per se, are better off? Prices go up when people value a ticket than they value the alternative consumption that the ticket’s price embodies. Flexible pricing enables us to sort out the cases when this is true from the cases when it isn’t true. In the old days, we needed illegal ticket scalpers to do that. Now ticket brokers can do it, but not as well as when the team gets involved in the process, too.

If the Royals benefit from flexible pricing, doesn’t this mean that fans must lose? Both entities can’t benefit at the same time, can they? The left-wing, socialist concept of exchange as a power relation implies that trade is a zero-sum game in which the gains of one party are the losses of the other. Mutually beneficial voluntary exchange benefits both parties to the exchange, and when the gains from trade are increased the gain can be divided to benefit both traders. This needn’t be true in every transition from inefficient to efficient conditions, but there is no reason to doubt its occurrence here.

Perhaps the most concrete way to drive home the importance of this principle is by stressing the fact that the benefits of sports teams are heavily location-dependent. If the Royals move away from Kansas City and operate elsewhere, most of the benefits created by the team will flow to sports fans in that new location. Allowing the Royals to maximize the benefits they earn from the value the team itself actually creates will maximize the chances that the Royals continue to operate in Kansas City. The current system strives to keep the team in town by giving them subsidies extracted from non-fans based on phony economic value not really created. Baseball fans deserve to get the value they want and are willing to pay for – not value extorted from unwilling third parties who gain nothing from the team’s presence.