DRI-275 for week of 6-1-14: The Triumph of Economics in Sports: Economics Takes the Field to Build Winning Teams

An Access Advertising EconBrief:

The Triumph of Economics in Sports: Economics Takes the Field to Build Winning Teams

In the previous two EconBriefs, we spoke of a popular attitude towards sports. It looks nostalgically to a hazy past, when men played a boys’ game with joyous abandon. Today, alas, sports are “just a business,” which is “all about the money.” As elsewhere, “greed” – a mysterious force no more explicable than a plague of locusts – has overtaken the men and robbed them of their childlike innocence.

This emotional theory of human behavior owes nothing to reason. It is the view now commonly bruited by those who describe the financial crisis of 2008 and the Great Recession as the outcome of free markets run rampant. People are irrational, so the result of “unfettered capitalism” must naturally be chaotic disaster.

Economics is the rational theory of human choice. For a half-century, it has opposed the irrationalists from two directions. Its free-market adherents have been led by the Chicago School of Frank Knight, Milton Friedman and George Stigler. That school embraced a theory of perfect rationality: perfect knowledge held by all market participants (later modified somewhat by a theory of information only slightly less heroic in its assumptions), perfectly competitive markets and (where necessary) perfectly benevolent government regulators and/or economist advisors.

The neo-Keynesian opponents of Chicago accepted individual rationality but asserted that individually rational actions produced perverse results in the aggregate, leading to involuntary unemployment and stagnant economies. Only counteracting measures by far-seeing government policymakers and regulators – following the advice of economist philosopher-kings – could rescue us from the depredations of free markets.

The debate, then, has largely been defined by people who saw market participants moved either by utter irrationality or complete rationality. But our analysis has revealed instead an evolutionary climate in which participants in professional sports pursued their own ends rationally within the limits imposed by their own knowledge and capabilities. The great free-market economist F.A. Hayek observed that capitalism does not demand that its practitioners be rational. Instead, the practice of capitalism itself makes people more rational than otherwise by continually providing the incentive to learn, adapt and adopt the most efficient means toward any end. Professional sports has exemplified Hayek’s dictum.

Early on, in its first century, the pursuit of individual self-interest left baseball owners, players and fans at loggerheads. The first owner to address himself to the task of improving the product provided to sports fans was Bill Veeck, Jr., who introduced a host of business, financial and marketing innovations that not only enhanced his own personal wealth but also treated his fans as customers whose patronage was vital. The attitude of ownership toward fans prior to Veeck can be gleaned from the dismissal by New York Yankees’ general manager George Weiss of a proposed marketing plan to distribute Yankee caps to young fans. “Do you think I want every youngster in New York City walking around wearing a Yankees’ cap?” snorted Weiss. Veeck made owners and administrators realize that this was exactly what they should want.

Although few people seemed to realize it, economics had yet to play its trump card in the game of professional sports. Economics is the study of giving people what they want the most in the most efficient way. What sports fans want the most is a winning team – and that is exactly what economics had failed to give them. It failed because it had never been deployed toward that end. Even Bill Veeck, despite his success in improving the on-field performance of his teams, had not unlocked the secret to using economic principles per se to win pennants and World Series.

As sometimes happens in human endeavor, baseball had to traverse a Dark Age before this secret was finally revealed.

The Dark Age: Municipal Subsidies and the Growth of Revenue Potential

During Bill Veeck’s swan song as baseball owner in 1975-1981, baseball had entered the period of free agency. The reserve clause tying players to a single team had been drastically modified, allowing players to eventually migrate to teams offering them the best financial terms. As we indicated earlier, this development – viewed in isolation – tilted the division of sports revenue from ownership to players.

This created the pretext by which owners were able to extract subsidies from municipalities throughout the nation. Owners could truthfully claim that they were earning less money as a result of free agency. What they left out was that they were earning more money for a host of other reasons. The obscure nature of player depreciation hid the true financial gains of sports-team ownership from the public. Moreover, the early years of free agency coincided with the advent of massive new revenue sources for owners. Television had brought baseball to millions of people who otherwise saw few games or none; broadcast rights were becoming a valuable asset of team ownership. Radio-broadcast rights increased in value as the increased visibility of teams and players enhanced their popularity. These increases were just gaining speed when the vogue of sports-team subsidies became a national pastime of its own.

The movement of baseball teams had long been viewed as analogous to the movement of businesses. Even the loss of popular teams like the Brooklyn Dodgers and New York Giants to westward expansion of baseball in Los Angeles and San Francisco was grudgingly accepted, since baseball still remained in New York City and the Mets were added as an expansion franchise in 1962. But when the Athletics moved from Kansas City to Oakland in 1967, Missouri Senator Stuart Symington decided that the federal government could not countenance “unfettered capitalism” in the baseball business. He demanded that major-league baseball replace Kansas City’s lost franchise. This opened the floodgates to the intrusion of politics in baseball.

If it was fair for politicians to dictate where major-league baseball should operate, then franchises should be able to demand favors from local governments – or so reasoned baseball owners. And demand them they did.

Owners demanded that teams build new, larger, better-appointed stadiums for their sports teams. Cities should fund construction, own the stadiums, operate them, maintain them and lease them to the sports teams for peanuts – otherwise, owners would pack up and move to a city that would meet their demands.

What was in it for the host city? After all, not everybody is a sports fan. Owners sensed that they needed something to offer the city at large. Thus was born one of the great con games of the 20th century: the notion of sports as economic-development engine of growth. Owners seized on the same thinking that animated the dominant neo-Keynesian economic model. They sponsored “economic-impact studies” of the effect sports teams had on the local economy. In these studies, spending on sports took on a magical, mystical quality, as if jet-propelled by a multiplier ordained to send it rocketing through the local economy. And everybody “knew” that the more spending took place, the better off we all were.

It is hard to say what was worse, the economic logic of these studies or their statistical probity. It was not unusual to find that a study would add (say) the money spent on gasoline purchases at stations adjacent to the stadium to the “benefits” of sports team presence. Of course, this implies that locating the team as far as possible from the fans would increase the “benefits” dramatically; it is a case of cost/benefit analysis in which the costs are counted as benefits. This novel technique inevitably produces a finding of vast benefits.

As time went on, sale of team artifacts and memorabilia was added to the list of supplemental revenue. Larger stadiums, lucrative TV, radio and cable rights, team product sales – all these drove revenues to owners through the roof as the 20th century approached its close. With municipalities subsidizing the ownership, maintenance and improvement of stadiums, it is no wonder that the capital gains available to owners of sports teams were phenomenal. Ewing Kauffman bought the Kansas City Royals’ franchise for $1 million in 1968. At his death in 1993, the team’s value was estimated at well over $100 million.

One might have expected the usual left-wing suspects to recoil in horror from the income redistribution from ordinary taxpayers to rich owners and rich ballplayers – but no. Newspaper editorialists threw up their hands. The economists who supported free agency said that the major-market teams would get the best players, didn’t they? And hadn’t things worked out just that way, before free agency as well as after? If small-market taxpayers want to win – or even have a team at all – they’ll just have to ante up and face the fact that “this is how the game is played in today’s world.” Besides, doesn’t economic research show the economic-development benefits of sports teams?

Heretofore, economics had operated beneficially, albeit in a gradual, piecemeal way. Now the distortion of economics by the owners and their political allies meant that it was serving the ends of injustice.

Economics – and baseball fans – needed a hero. They got one – several, actually – from a pretty unlikely place.

Middle American Ingenuity to the Rescue

Bill James was born in tiny Holton, KS, in 1947. From childhood, he was a devoted sports fan. Like countless others before him, he was fascinated by the quantitative features of baseball and studied them obsessively. He was unique, though, in refusing to take on faith the value of conventional measures of baseball worth such as batting average, fielding average and runs batted in. James developed his own theories of baseball productivity and the statistical measures to back them up.

In 1977, he published the first edition of his Baseball Abstract, which subsequently became the Bible for his disciples and imitators. James was suspicious of batting average because it deliberately omitted credit for walks. (Ironically, walks were originally granted equivalent status with hits in computing batting average; “Tip” O’Neill’s famous top-ranking average of .485 in 1887 was accrued on this basis. The change to the modern treatment took place shortly thereafter.) While it may be technically true that a walk does not represent a “batting” accomplishment, it is certainly the functional equivalent of a single from the standpoint of run-producing productivity. (Veterans of youth baseball will recall their teammates urging them to wait out the opposing pitcher by chanting, “A walk’s as good as a hit, baby!”) Moreover, walks have many ancillary advantages. Putting the ball in play risks making an out. A walk forces the opposing pitcher to throw more pitches, thereby decreasing his effectiveness on net balance. Waiting longer in the count increases the chances that a hitter will get a more hittable pitch to hit, one that may be driven with power. For all these reasons, James made a convincing case that on-base percentage (OBP)is superior to batting average as a measure of a hitter’s run-producing productivity.

Rather than the familiar totals of home runs and runs batted in, James argued in favor of a more comprehensive measure of power production in hitting called slugging percentage (SP), defined as total bases divided by at bats. This includes all base hits, not just home runs. Instead of runs batted in, James created the category of runs created (RC), defined as hits plus walks times total bases, divided by plate appearances. James also sought a substitute for the concept of “fielding average,” which stresses the absence of errors committed on fielding chances actually handled but says nothing about the fielder’s ability or willingness to reach balls and execute difficult plays that other players may not even attempt. Moreover, fielding must be evaluated on the same level with offensive production since it must be just as valuable to prevent run production by the opposing team as to create runs for the home team.

These measures and maxims formed the core of Bill James’ theory of baseball productivity. His Baseball Abstract computed his measures for the major-league rosters each year and analyzed the play and management of the teams each year. Gradually, James became a cult hero. Others adopted his methods and measures. The Society for American Baseball Research (SABR) sprang up. The intensive study of quantitative baseball – eventually, sports in general – came to be known as “sabermetrics.” Even with all this attention, it still took decades for Bill James himself to be embraced by organized baseball itself. That, too, happened eventually, but not before sabermetrics left the realm of theory and invaded the pressbox, the front office and the very baseball diamond itself.

Moneyball Takes the Field

Billy Beane was a high-school “phenom” (short for phenomenal), a term denoting a player whose all-round potential is so patent that he “can’t miss” succeeding at the major-league level. Like a disconcerting number of others, though, Beane did miss. He played only minimally at the major-league level for a few years before quitting to become a scout. He rose to the front office and was named general manager of the Oakland Athletics in 1997. Beane’s mentor, general-manager Sandy Alderson, taught him the fundamentals of Bill James’ theories of baseball productivity. To them, Beane added his own observations about player development – notably, that baseball scouts cannot accurately evaluate the future prospects of players at the high-school level because their physical, emotional and mental development is still too limited to permit it. Thus, major-league teams should concentrate on drafting prospects out of college in order to improve their draft-success quotient.

Beane hired a young college graduate from HarvardUniversity – not as a player but as an administrative assistant. Paul DiPodesta was an economics major who was familiar with the logic of marginal productivity theory. The theory of the firm declares that managers should equalize the marginal productivity per dollar (that is, the ratio of output each unit of input produces at the margin to the input’s price) between inputs by continually adding more of any input with a higher ratio until the optimal output is reached. Of course, the problem in applying this or any other economic principle to baseball had always been that the principles were non-operational unless a meaningful measure of “output” could be found and the inputs contributing to that output could be identified. That was where Bill James and sabermetrics came in.

In 2001, the Oakland team had won the Western Division of the American League. But their star player, Jason Giambi, has been wooed away by a seven-year, $120-million dollar contract offered by the New York Yankees. It was the age-old story, the “Curse of the Bambino” all over again in microcosm. Oakland’s success had ramped up the value of its players on the open market; replacing those players with comparable talent at market rates would bust the payroll budget. Various other Oakland players were lost to injury or disaffection or free agency. Throughout baseball, opinion was unanimous that the Athletics were in for hard times until the team’s talent base could be rebuilt through player development.

Beane and DiPodesta used the most basic sabermetric concepts, such as ONB, SP and RC, as their measures of productivity. Using publicly available information about player salaries, they calculated player productivities per dollar and discovered the startling number of players whose true productivity was undervalued by their current salaries. Methodically, they set out to rebuild the Oakland Athletics “on the cheap” by acquiring the best players their budget could afford through trade or purchase of contracts. They substantially remade the team using this approach. Despite a slow start, their rebuilt club eventually tied the all-time major-league baseball record by winning 21 straight games and successfully defended the Western Division championship in 2002 and 2003. Author Michael Lewis outlined their story and the rise of sabermetrics in baseball in his 2003 best-selling book Moneyball, which later became a 2011 movie starring Brad Pitt that received six Academy Award nominations.

For the first time, baseball management had explicitly used an economic production function – marginal productivity theory with an operational definition of product or output – to maximize a meaningful object function – namely, “wins” by the team. And they succeeded brilliantly.

Money See, Money Do

In 2003, new Boston Red Sox owner John Henry hired Bill James as a consultant to management, to put the theories of sabermetrics into practice in Boston. During 2001 and 2002, the team had lugged the second-highest payroll in major-league baseball to disappointing results. But in 2003, with a lower- (6th-) ranked payroll, the Boston Red Sox laid the ghost of Babe Ruth by winning their first World Series since 1918. Over the succeeding decade, the Red Sox became the success story of baseball, winning the World Series three more times.

Was this a case of what Rocky’s manager Mickey would call “freak luck?” Not hardly. Thanks to the success of Oakland and Boston and Michael Lewis’s book, the tale of Bill James and sabermetrics traveled. Throughout baseball, sabermetrics ran wild and economics reigned triumphant. In 2003, the Detroit Tigers lost an American-League-record 119 games. In 2006, with only the 14th-highest payroll out of 30 major-league teams, the Tigers won the American League championship. In 2008 and 2009, the Washington Nationals were the worst team in baseball. In 2012, with baseball’s 20th-highest payroll, they had baseball’s best record. In 2010, the Pittsburgh Pirates lost 105 games. In 2013, with baseball’s 20th-highest payroll, they made the post-season playoffs. The Cleveland Indians rebounded from sub-.500 seasons to playoff finishes twice between 2006 and 2014, despite never ranking higher than 15th in the size of their payroll; usually, they ranked between 20th and 26th.

The crowning achievement was that of the perennial cellar-dwelling Tampa Bay Devil Rays. Cellar-dwelling, that is, in the size of their payroll, but not necessarily in the season standings. After years of dismal finishes, the 2008 TampaBay team became American League champs despite ranking 29th (next to last!) in the size of their payroll. They have made the playoffs in four of the six subsequent years, but their payroll continues to languish at the bottom of the major-league rankings.

The New Frontier

Does this mean that the generalization about large-market teams getting the better players and enjoying the better results was and is a lie? No, it was and still is true. But like all economic propositions it is subject to qualification and careful statement.

First, it is a ceteris paribus proposition. It is true that “you can’t beat the stock market (averages)” but every year some people (particularly professional investors) do it. You can’t do it systematically by trading on the basis of publicly available information. The few people who succeed do it on the basis of (unsystematic) luck or by uncovering new information (legally) before it becomes generally known. The market for professional sports is not nearly this efficient; techniques of sports productivity evaluation are not nearly as refined and efficient as those of stock evaluation and trading, which leaves much more room for systematic exploitation by techniques like those of sabermetrics.

Second, the term “large market” is no longer limited by geography as it has been during the first century and a half of U.S. professional sports. Ted Turner’s promotion of the Atlanta Braves using his cable-TV stations blazed the trail for turning a local team into a national one, thereby increasing the value of the team’s broadcasting and product rights. Today, there is no inherent geographic limitation of the size of the market for any team – no reason, for example, why the Kansas City Royals or Chiefs could not become “the world’s team” and sit atop the largest market of all.

The Evolutionary Approach to Free Markets

The correct approach to economics is not the irrationalist view that has clouded our understanding of professional sports. Neither is it the perfectionist view of the ChicagoSchool, which has oversold the virtues of free markets and damaged their credibility. It is certainly not the remedial view of the neo-Keynesian school, which has failed whenever and wherever tried and is now undergoing its latest serial failure.

The evolutionary approach of the true free-market school, so nobly outlined by Hayek and his disciples, fits the history of baseball like a batting glove. It is now in full flower. Taxpayers need no longer be violated by owners who promote false economic benefits of sports and hide the real ones. Fans no longer need languish in a limbo of psychological unfulfillment. Economics – not politicians, regulators or academic scribblers – has come to the rescue at last.

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.