Thursday, January 25, 2007

The Football Price Index and Elasticity

From both sides of the Atlantic this week, we have news reports of increases in football ticket prices. In England, where the word "football" sensibly refers to a sport in which one kicks a ball with one's foot, the Sun proclaims that "Prices will kill football." In the United States, where the same word refers to a game in which one's feet are generally used only to carry the rather substantial weight of an American football player, colleges and professional teams alike are also raising their prices. Case in point: LSU will raise the prices on its base tickets and on fees for season ticket holders.

Whether those price hikes are sensible depends on the elasticity of demand for tickets in each case. In the British case, a survey by Virgin Money shows that attendance has dropped dramatically in the face of price hikes. Just as the CPI uses a bundle of goods to measure inflation, the Virgin survey takes into account the price of a "bundle" consisting of such items as club merchandise, food and drink at the games, and transportation costs for home and away games in addition to the cost of tickets. By their calculations, the inflation rate in this index has been greater than 17%—more than five times that of general prices in England. The impact on attendance has been severe: according to the survey, more than 40% of fans have cut back on their attendance at games.

Of course, prices cannot actually kill football, no matter what the Sun fears. Firms will only continue to raise their prices as long as doing so also raises their revenues. If teams hike their prices by 17% and see attendance drop by more than 17%, they'll see a drop in overall revenue. In general, if we assume that the marginal cost of hosting an individual football fan is negligible, then teams will eventually set ticket prices at such a level that if they were to raise prices, they would lose more money from lost sales than they would make from higher revenue per fan; and if they were to lower prices, they would lose more money from decreased revenue per fan than they would gain in increased sales.

The economic concept used to analyze this situation is elasticity—the ratio of the percentage change in quantity demanded to the percentage change in price. As we can see in the example of the English football league, when the elasticity of demand is less than one (that is, the percentage decline in attendance is smaller than the percentage change in price), teams can raise their prices and see their revenues increase.

Discussion Questions

1. According to the article in the Sun, why are Virgin Money researchers fairly sure the decrease in attendance at games is due to increased costs?

2. LSU has had back-to-back banner seasons. What effect is this likely to have on the elasticity of demand for LSU tickets?

3. Interesting questions of elasticity come into play when firms price discriminate. For example, LSU is raising its ticket prices, parking-lot fees, and motor-home prices, but not student ticket prices. Why do you think this is the case?



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