Musings on in-stadium economicsBy
Nothing irks sports fans more than concession prices. Inside of a stadium, everything costs more. A beer you might buy for $5 at a sports bar costs $9 or even $11 inside the stadium. A steak sandwich that sells for $8 can go for as much as $15. Even New Era Hats, priced at a steep $34 at the flagship store, can go for $40 inside the stadium.
Meanwhile, fans like to justify the prices and their ballpark expenses by blaming — or celebrating — the payroll. Yankee fans are willing to pay so much for concessions because the team has a $200 million payroll, and that lofty total demonstrates the Steinbrenners’ devotion to winning. Or so it goes.
In the Wall Street Journal this week, Allen Barra, he of the excellent Yogi Berra biography, challenges that assumption. Prices inside a stadium are high, he says, because a stadium is a natural monopoly with a captive audience. Barra writes:
The point is that prices go up because the owners think that’s what you’re willing to pay. If you are willing to pay, the price stays high. If you aren’t — or at least if enough of you aren’t — then the price will come back down. It’s that simple.
The athletes and their agents don’t determine the price of tickets, souvenirs and food. Not even the owners determine them. Well, they sort of do when it comes to the food. The hamburger joint across the street from the park probably charges half of what you pay at the game, but that’s because the ball club has a monopoly. In general, though, you are the ones who set the prices for T-shirts and baseball hats.
It may take a while but eventually, if baseball management has overpriced its commodities, consumers — that’s you, the fans — will show them their error and the prices will come down. If you are willing to pay their prices that means they set the right prices after all.
It is a very valid argument, but Barra obscures his point by the end. He says that if society were to stop spending as much at baseball stadiums, then prices and salaries would go down. There is, it seems, a cause-and-effect problem. If salaries don’t determine how much a team can charge, then why would cutting fan spending reduce salaries?
In reality, salaries do have an impact on how teams set their prices. The teams need to generate a certain margin to cover their expenses. For the Yankees, that includes a lofty payroll and luxury tax payments. While revenue from TV deals and licensed merchandise sales cover some of that, the rest is captured through ticket sales and in-stadium concession deals.
Where the monopoly takes over though is in the profit space above the margin. Once the Yankees recover the payroll and luxury tax figures, anything they make above that is pure profit that can be pocketed or reinvested in the team in future years. If that $15 cheese steak were $12 instead, the Yanks’ would probably be covering their costs and more. But since fans are willing to pay $15 for it, the Yankees will continue to charge that much, pocketing the profits as any company would.