Elasticity and Football...It Doesn't Get Much Better!

“The NFL has no incentive to work out a deal with the real refs because demand for the game is inelastic.” – Steve Young, on the Monday Night Football set directly following the infamous Packers vs. Seahawks game.

Is it true? Does the NFL really have no incentive to improve operations because demand for the game is inelastic? According to the furor of ESPN analysts who suddenly discovered the economic definition of “elasticity”, it certainly is true. If it is true, what would prompt the NFL to change anything? If the same number of fans will watch regardless, surely there is no incentive to ever improve operations. If, for example, the ticket prices raised 100%, would you still attend the games? Surely Steve Young knows what he’s saying. After all, he did graduate from BYU with both his undergraduate and JD (of course, we all know BYU is the school where they encourage a man to have multiple…utility curves).

Economicseducation

First, let me define demand elasticity in the context of economics. Demand elasticity is the percentage change in demand over the percentage change for a certain variable. For example, if the relative income for the market of an NFL team went up 10% and ticket sales went up 20%, the income elasticity of demand is 2 or (20%/10%). Since the elasticity is greater than 1, it is said to be elastic. If the elasticity was less than 1, it’d be inelastic, and at exactly 1, it’s unit elastic.

Now that we’ve completed our economics 101 lesson for the day, let’s think back to my last blog where I posited a reason that metropolitan GDP in college towns was uninfluenced by team performance. I said this is because of relatively inelastic demand for college football tickets. Given what we’ve just established as elasticity, that seems like a reasonable enough conclusion now – at least I think.  My conclusion effectively stated the performance elasticity of demand was relatively inelastic, or maybe even nearly perfectly inelastic in the short term, to where the same number of fans will patron a team and its hometown businesses the same regardless of performance. Here, though, I’m going to review this paradigm for the NFL and compare it to college football through an equitable qualitative analysis.

In order to do this, let’s first set some parameters. Now, when Steve Young made his remark, he was referring to referee elasticity of demand. However, the influx of analysts who suddenly seemed enthusiastic about this remark didn’t exactly understand this, as they continually regurgitated their Wikipedia definitions of price elasticity of demand. As such, here I’m going to compare only the price elasticity of demand for the NFL and college football. Also, I’m aware the best way to do this would be to gather exhaustive ticket price and attendance data, run the regressions, and estimate elasticity. However, I’m going to assume teams have already done this correctly and I’m going to infer the elasticity from the behavior of the teams and corresponding pricing.

I made this graph, so don't say anything about the aesthetics!

Ok, so first let’s tackle the NFL (pun intended). In short, the NFL is NOT inelastic in terms of price and demand. In a recent article on Yahoo!Finance, it was explained that NFL stadium profits are hurting, and thus, teams are lowering ticket prices to elicit greater profits. Assuming Steve Young was right and other kinds of demand in general is inelastic (thereby assuming no demand curve shifts), this means NFL ticket prices are elastic. If we observe the graph to the left, we’ll notice that profit is maximized at unit elasticity, and thus, lowering prices means the NFL was previously operating in the elastic portion of the demand curve (there could be several other factors at play here, but remember, I’m assuming owners have already controlled for these).

Next, let’s hit college football. Based on my previous blog’s quantitative analysis, I’ll again assume general demand is consistent and no shifts are imminent. As such, it is apparent price elasticity of demand for college football is inelastic. Recent studies have shown that college ticket prices have been steadily rising at abnormal rates (adjusted for inflation, that is), and ticket sales remain incredibly high. This may even suggest college football is nearly perfectly inelastic. Again, if we consult our trusty graph above, we’ll see that raising ticket prices leads to more profits in the inelastic portion of the demand curve (again, there could be other factors, but I’m assuming they’re controlled).

So why does college football get to enjoy price inelasticity and not the NFL? Brace yourself because I’m about to hit you with some marketing here…it’s because of branding. People often assert the NFL is tremendous and powerful brand. While this may be true, its brand doesn’t hold a candle to college football.  College football is able to connect with fans at a much more intimate level, where many of the fans feel a VERY real sense of belonging to the school. College football fans will base their entire year around attending games, and will mortgage their lives to make sure to see top rivalries. While people love the NFL, too, fans aren’t as concerned with attending games. Very rarely do you see the connection between fans and NFL teams that you do with college football teams. In fact, those NFL teams with even a remotely passionate fan base are often compared to a “college football atmosphere”. In that sense, college football has excelled at creating a holistic that brands much more than just the game.

So what’s the lesson here? Connect with your customers and you will control them (with prices at least). Is that cynical?