THE DEMAND FOR NFL FOOTBALL

Chapter 2 THE DEMAND FOR NFL FOOTBALL 2.1. Introduction This chapter considers the demand for NFL football. Football demand is unusual as compared ...
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Chapter 2 THE DEMAND FOR NFL FOOTBALL

2.1.

Introduction

This chapter considers the demand for NFL football. Football demand is unusual as compared with many goods and services. Rather than market clearing at competitive price levels or limited demand induced by monopoly pricing, the equilibrium position for many football teams is one of excess demand. Football attendance is characterized by excess demand and generally tight market. A theory of Becker (1991) helps explain the demand for football. Becker’s theory is that demand in some situations depends on social interaction and the size of the crowd. DeSerpa (1994) has adapted this theory for NFL football and other situations where the crowd composition is as important as the crowd size. Using data from 1995 through 1999 for all NFL teams during their regular season, I construct an econometric model of the demand for NFL football. I use this model to test the Becker/DeSerpa theory and conclude that the demand curve slopes upward in the relevant range as anticipated by the theoretical model. The next section of this chapter discuss NFL football demand. In Section 2.3, I discuss bandwagons, social influences, and group demand behavior. In Section 2.4, I discuss the Becker model and DeSerpa’s extensions. Section 2.5 presents the econometric model while Section 2.6 provides conclusions.

2.2.

The Demand for NFL Football Tickets

For many products, sellouts and excess demand are the prevailing phenomena. Evidence of excess demand includes season ticket programs, personal seat license contracts (PSL), near capacity crowds, and “sellouts.” In the context of NFL ticket demand, these factors indicate tight markets and are consistent with

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the theoretical notion of excess demand.1 For instance, for many NFL teams, fans cannot obtain a season ticket directly from the team. Similarly, it is often not possible to directly obtain a playoff ticket to see these teams play in the post-season. In such situations, aftermarkets develop for providing tickets to eager fans at prices well in excess of the ticket’s face value. This pattern of excess demand is not limited to football. It is also seen in rock concerts, popular restaurants, and Broadway plays. In situations with excess demand (i.e., where demand exceeds supply) the price of the good in question should rise until the excess demand is eliminated. However, prices rarely rise to the point where only those most willing to pay gain admission. This anomaly can be explained. First, the outcomes of sporting events are uncertain. Many factors affect a team’s success. For example, when an NFL team has an unsuccessful season, it is awarded a higher draft choice, raising its chances to improve its personnel, and perhaps improve its winning percentage. Conversely, when an NFL team has a successful season, it is “rewarded” with a more difficult schedule in the next season. These choices by the league are clear attempts to balance competition and create parity among the teams. Additionally, injuries or plain luck can affect a team’s performance in any given year. These qualities contribute to a situation that is characterized by considerable uncertainty in how consumers value individual games. Some games will be relatively low-demand games while others are likely to attract more fans, and thus have high demand. In the football market, fans are given the opportunity to buy a season worth of tickets at one time. In principal, a season ticket package sells for the number of games in a season times the face value of an individual game ticket. Consumers can then choose which games to attend based on their reservation valuation. In other words, when fans perceive that their reservation value exceeds the price already paid for the ticket, they will attend the game. Conversely, when fans perceive that their reservation value is less than the amount they paid for the ticket, they may choose to skip a particular game. Given the transaction costs associated with reselling a ticket; the restrictions on reselling tickets that exist in some markets; and the possibility that a consumer will not attend every game in the season, consumers generally place less value on the full set of tickets than they do for each game purchased at face value (as evaluated on a game-by-game basis for only those games they attend). On the other hand, purchasing season tickets provides an individual with some option value. First, in markets where demand exceeds supply, the only way to guarantee admission to a game is by owning a season ticket. Second, the season ticket provides an option to enjoy games that may rise in consumer 1 The

PSL is an upfront one-time charge placed on top of the season ticket price to guarantee the right to purchase the same or better season ticket for some period of time.

The Demand for NFL Football

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value during the season. Third, the season ticket provides an option to purchase post-season tickets for playoff games. The fee that management charges for post-season tickets may price a consumer out of the market, but the option value remains. On average, a season ticket is valued by the consumer and priced by management to reflect the individual game ticket price, the likelihood of post-season play, the price differential between the market and face value of a post-season ticket, and the transaction costs associated with reselling or purchasing tickets in the market during the regular season. With considerable uncertainty about any given team’s success, sellers face a complex market in setting season ticket pricing policies. Management can adopt an exploitative position and charge what the market would bear in any given season. However, if a team performs poorly, the season ticket price would have to be lowered the following year to ensure demand. The cost to management of exploitation is the loss of stable demand (i.e., large fluctuation in attendance and fan loyalty). Consumers, on the other hand, are willing to pay a price to ensure access to seasons when the team plays well, and suffer through the seasons when the team does not meet performance expectations. The value of stable demand to management reduces its incentive to change season ticket prices often (i.e., season to season). Rather, in order to ensure stable demand, management might charge a price that reflects the consumers’ option value of guaranteed access to regular and post-season play. Furthermore, management might offer a discount to consumers to ensure stability in demand. These factors help explain the fact that season ticket prices do not rise to clear excess demand in the short term. Specifically, excess demand in the short term may be followed by excess supply in a subsequent period. Consumers will pay a price for season tickets that reflects both the good times and the bad times. However, the foregoing explanation of ticket pricing does not demonstrate why persistent excess demand is often the rule rather than the exception in professional football. It does explain why management prefers stable pricing and favors uniform pricing during the season, with only moderately increased prices for post-season play. Nonetheless, it cannot explain why markets in the NFL can sustain excess demand year after year. To explain this, I rely on a theory of group behavior.

2.3.

Bandwagons, Social Influences, and Group Demand

Many products that consumers purchase have the property that the enjoyment or utility provided to the consumer depends on the crowd. Audience reaction and participation are consumed with the commodity itself. For instance, witnessing a live performance by a popular music group, eating in a popular restaurant, attending a Broadway play, and watching a football game all pro-

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vide opportunities for the consumer to interact in a social setting with other consumers who are similarly enthused by the event and are able to signal this enjoyment. The audience’s performance can also be an important contributing factor to the performance of the attraction (the team may react positively to fan support, or the rock star might provide a better show with a lively audience). Gary Becker (1991) helped explain why consumers reveal excess demand for popular restaurants and leave nearby restaurants empty. Becker’s theory is similar to Leibenstein’s (1950) bandwagon model where an individual’s demand depends on the aggregate consumption. Similar models have been put forth by Bass (1969) and others who explain that the likelihood of purchase may increase with the behavior in aggregate. However, such models are different from Becker’s model in that they do not require social interaction. DeSerpa (1994) and DeSerpa and Faith (1996) have adapted Becker’s model to explain that the composition of those participating in a jointly consumed venue may sometimes be as important as the number of participants. I review Becker’s explanations below. Three observations are important. First, higher demand is rewarded with higher valuations by consumers (i.e., the demand curve slopes upward); a crowded restaurant entices more patrons than an empty one. Second, multiple equilibrium are simultaneously possible with similar market prices (empty restaurants and full restaurants) with the equilibrium resulting in excess demand being desirable to owners. Third, the equilibrium with excess demand is potentially unstable. A corollary to Becker’s theory is that initial conditions are often important in establishing the observed equilibrium. Failure to initially achieve an excess demand equilibrium may lead to stagnant outcomes in which it is impossible to achieve the more desirable excess demand equilibrium. Analogously, the inability of a team to sell out its stadium may produce a downward cycle of future poor attendance. I discuss this in greater detail below.

2.4.

Becker’s Model

Becker’s model assumes that an individual’s demand depends on the aggregate demand level where:

         denoting the demand of the  th consumer and denoting the with  aggregate or market demand. The summation is taken over all purchasers       !    # "     . I expect  since all individuals have downward %  & $ ' ('*) because individual sloping demands. Similarly, I expect 2

demands increase with group demand by assumption. For each value of market 2I

use the notation

+(,

to denote the partial derivative i.e.,

+(,.-0/1+%24365879;: