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10 Questions for economist Lee Ohanian on the business of sports

Lee Ohanian.head shotThis time of year is pure heaven for sports fans — basketball, tennis, golf and hockey are all in full swing and, of course, the Super Bowl is right around the corner. What better time to launch a brand-new Fiat Lux seminar for first-year students called "The Economics of Sports"?
Taught by Professor Lee Ohanian, the lively course attempts to answer many complex questions: Why do today’s sports superstars earn as much as 100 times more than superstars of a generation ago? Should NCAA student-athletes receive salaries? How much is the Los Angeles Lakers franchise worth? Why is Major League Baseball exempt from antitrust prosecution?
Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA. He sat down recently with UCLA Today’s Wendy Soderburg to explain how he is using a topic popular among many students to introduce economic concepts.
What was the impetus behind "The Economics of Sports"?
Last summer, I was asked by the Economics Department to redevelop our freshman introductory courses. In the process, I wanted to think of various ways that we could get UCLA students started on the right foot — to get them excited about how economics can be used to understand the world around them, not economics as a boring, stale subject. What better way to do this than to teach a course about sports?
What kind of students are in the class?
On the first day, I asked them to list what sports they enjoy and what sports they play. The common denominator is that all 20 students are sports nuts. Not surprisingly, a number of them like football and basketball. A few like some less obvious sports, such as lacrosse, golf and tennis. But everyone wrote down at least two sports — some as many as four or five — that they either played or followed.
In terms of the students’ backgrounds, it’s all over the place. There’s a biophysics pre-major and economics pre-majors. But it really runs the spectrum in terms of academic interest. … There are more men, but I thought I might end up with 19 men and one woman. I think it’s closer to two-thirds men and one-third women, which I’m really happy about.
How do you choose the topics?
The great thing about this class is that the world of sports provides some of the most vivid illustrations of economic concepts. Things such as, if you allow businesses to collude and form cartels, they will — and this always happens in sports. If you allow workers to collude and form unions, they will. 
Or take the situation where Los Angeles Angels fans are critical of [owner] Arte Moreno for not spending more money on free agents. His answer is, "I want to keep the game affordable for fans. I’m doing this for you." But economics tells you he’s a smart businessman. He understands that even though the Angels might be more successful in terms of winning, he would have to spend so much more money on payroll that his profits might be lower. So the most winning strategy isn’t always the most profitable strategy.
Is that a good idea? Because if the team isn’t winning, then the fans aren’t going to come.
One of the things we talk about in class is there is a sort of tension between winning and profits. Getting attendance requires either a low price or a really high-quality product. And a really high-quality product means that you have to spend more. And so, as a team owner, you’re going to make two decisions; one, how should you price your tickets, and two, how much talent should you buy? Should you be like the New York Yankees and try to buy every All-Star there is? Or should you be like a small-market team and have one or no stars on the team and be a perpetual cellar-dweller? I want to help my students understand this tension between cost, demand and profits.
How do sports differ from other goods and services that you buy?
Sports are fundamentally different in that they require an opponent — a worthy opponent — and you also need superstars. Sports are an entertainment product in that they have the superstar thing, as do movies, music, theater, whatever. But sports are different because they have the opponent aspect. 
Wimbledon gets a huge rating when [Rafael] Nadal plays [Roger] Federer — a worthy opponent. Wimbledon would not get a huge rating if Nadal was playing the 150th-ranked tennis player in the world, even if that 150th-ranked tennis player was a superb tennis player and remarkably gifted, because everybody knows it’ll be 6-3, 6-1, 6-2. It won’t be worth watching. Or for golf touring pros, you might think they don’t want Tiger [Woods] in the field because that reduces their chances of winning. But they also know that their chances of winning won’t be that much different for any one individual if Tiger’s not there. And they also know that the TV ratings will be much, much higher — for example, TV ratings for golf tournaments are about 50 percent lower if Tiger’s not playing. So they know where their bread’s buttered.
Lee Ohanian.whiteboardHow should sports be priced?
That one can go off in a lot of directions. Essentially, there’s tension between what’s best for society and what’s best for the sporting industry. One of the things economics tells us is that competition is good. Competition among producers means that only the most efficient producers are in business and we get the lowest possible price. But the world of sports tries very hard to limit competition.
For example, we used to have the NFL and the AFL and, not surprisingly, they merged into what otherwise would be a football monopoly [NFL]. We used to have the NBA and the ABA. Quelle surprise, they merged. We used to have the World Football League, which fell apart. So they try very hard to limit competition because they know limiting competition allows them to become monopolists. And what monopolists do is get excess profits.
So there’s tension in that the world of sports limits competition and increases price, relative to what there would be if there were competition. What that suggests to me is that prices may be higher than what would be socially optimal and, believe it or not, there would not be as much sporting product in the marketplace as there otherwise would be.
What should be the goal of the National Collegiate Athletic Association (NCAA)?
The NCAA is the sole representative, or the sole rules-making body, for universities. A challenge the NCAA faces is that it has multiple goals that are remarkably in conflict with each other. One goal is to provide a framework for universities so that student-athletes can be provided with a broad-based college education and can graduate with the tools, skills and education that other students receive. And so we see emphasis on graduation rates of athletes and so forth.
That goal is in conflict with another goal of the NCAA — to make money for the universities. And college sports is remarkably big money. I mean, the Bowl Championship Series (BCS) just by itself is $160 million. Just by itself. Or take the "one-and-done" rule in college basketball, which means that when student-athletes come on campus, the best of them know that they will be there for one year — so their incentive to participate in college activities above and beyond their chosen sport is pretty small. So you've got this fundamental conflict between, on the one hand, helping student-athletes get a broad-based education and graduate with a degree, while on the other hand, earning a lot of revenue for the universities.
So the NCAA has these multiple objectives that are sometimes hard to reconcile. At some level, the NCAA also has a monopoly — they're the only provider of the service of managing college athletics. It’s hard to think of a world in which there would be a competitor to that, but if some competition could be introduced, I think we’d see some better outcomes. I mean, every single year there’s enormous criticism of one NCAA ruling or another.
Do you think there should be payment for college athletes?
Pure economics would say there almost would have to be, because college athletes are a scarce resource, and scarce resources typically receive at least some of the payments from the product they deliver. So given the competition between teams for athletes, pure economics would see them being paid. Now, from the standpoint of society, is that a good thing or a bad thing? That becomes a normative question. People have different points of view. But from the pure economic standpoint, if we lived in a competitive marketplace for college athletes, we definitely would see payments. From that perspective, incidentally, it then becomes very, very obvious why we hear about cheating and players getting under-the-table money.
Do you get feedback from your students on the class?
Well, we’ve only had four classes so far, but a couple of students have said they’re really enjoying it. I think what they’re seeing is the power of economic thinking in action — how the world of sports looks much different when viewed through the lens of economics than when viewed through the lens of just being a fan.
Obviously, you’re a sports fan. Do you have a favorite sport and team?
I played a lot of basketball. I grew up here in L.A., so it was hard not to be a Laker fan. I’m old enough to remember when Jerry West played and when Wilt Chamberlain played. So I’ve been watching the Lakers for more than 40 years. That makes me seem old. I guess I am!
In this video, Lee Ohanian comments on the economic clout of the Super Bowl:
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