When Jim Bowden announced the Barry Larkin signing, he managed to
darken the mood slightly by admonishing the fans that they were getting
exactly what they wanted…and that they’d have to pay for it. He told fans
that ticket prices would be going up, perhaps as early as this season,
because of the deal.
In a July 14 column in the Wall Street Journal, Sam Walker derided
major-league teams for their wastrel ways, lavishing large guaranteed
contracts on some really lousy players and then later releasing them. But
in arguing that this was bad for the game, he made the assertion that these
multi-million dollar goof-ups "contribute to higher ticket prices".
This claim–that higher player salaries lead to higher ticket prices–is
oft-repeated but completely illogical. If baseball could just raise ticket
prices willy-nilly whenever player salaries increased, the owners would
spend themselves into oblivion, knowing that sure profits awaited because
they could hike ticket prices to make up for the higher expenditures.
Economic analysis bears this assertion out. Economists spend a lot of time
considering monopolies–some try to find them where they don’t exist; on
your dime, no less–and their behavior is reasonably well understood.
Baseball teams are, in fact, monopolies. If you live in Boston and you want
to see a major-league baseball game, you have one choice and you will pay
through the nose for it. There are imperfect substitutes, but there is no
perfect substitute, making the Red Sox one of a few dozen monopolies. (Some
might argue that the Yankees and Mets constitute a duopoly and should
compete on price if they’re not colluding, but try telling a Yankee fan
that he can always go to Shea if he doesn’t want to pay for a Yankee ticket.)
Monopolists want to maximize their profits, just like all companies, but
they have relatively free rein in the market. Assuming there’s enough
demand for the good, a monopolist will produce and sell another widget if
the widget can be sold at a profit. The baseball widget is a ticket, and it
costs nothing to produce: everything, from the stadium to the players to
the union running the concessions, is already paid for.
Thus, to maximize profits, they maximize revenues: set ticket prices to a
level such that the total revenue generated by ticket sales is higher than
it would be for any other pricing structure. Teams all have software
systems to help them determine the optimal pricing level. It’s how they do
business.
So Jim Bowden’s bluster–that the Larkin contract just forced him to raise
ticket prices, gosh darn it–is hot air. The Reds will raise ticket prices
because fans will (they hope) be willing to pay more out of gratitude for
the team’s about-face on re-signing the popular star. In other words, the
Reds think they can make more money in total by raising ticket prices, and
they probably would have raised them for 2001 regardless of where Barry
Larkin was playing.
Some teams do depend on ticket prices for a large chunk–40% or so–of
their revenues, but the idea that these prices fluctuate with the fixed
expense of team salaries is hogwash. If anything, higher ticket prices lead
to higher salaries, since money in an owner’s pocket tends to burn its way
through to a free-agent signing.
Keith Law can be reached at klaw@baseballprospectus.com.
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