Day Out at The Football!

One of the decisions that football clubs make is the price of season and match-day tickets. Many organizations, including sports clubs, have some degree of market power. They are not price takers but instead, they choose what price to set.

Ticket prices charged by clubs often seem very high. For example, the most expensive season tickets in the English Premier League were sold by Arsenal for £1,769. The most popular season tickets range from £645 to £891.

For many sports fans, there can be incredibly strong emotional ties to their favorite team. For many supporters of clubs, the utility is largely derived from an attachment or loyalty to the club. These supporters would find it difficult to support another team.

The demand for success:

While the strong emotional ties supporters have to their clubs are very strong generally, supporters’ willingness to pay to watch a winning team will tend to be greater than for a team that loses regularly.

Because of this positive impact of the likelihood of winning on the demand for tickets, clubs often make announcements about player signings or a change of manager as soon as they can at the end of a season, and sometimes even before the end of a season.

The probability of winning can increase through relegation, so it is possible to argue that revenues from season tickets could increase as a result of relegation. However, in the majority of cases, when teams are relegated their revenue from ticket sales falls. This is because of another key factor that
influences the demand for a sport.

The absolute quality of the players:

Supporters not only value seeing their team win, but they also enjoy watching exceptionally talented athletes demonstrate their skills on the field of play. This is sometimes referred to as the ‘absolute quality of the players’. The absolute quality of the players will fall if a team is relegated (better players leave). Therefore the positive impact on demand for the increased probability of winning is more than offset by the lower quality of the players on the pitch.

Concessions:

In addition to the revenue earned from match tickets, a significant source of gameday revenue for sports clubs is concessions – beer, food, coffee, etc.. Sports clubs are often criticized for the high prices of the food on sale relative to high street restaurants and bars. For example, in Manchester United’s stadium, a pint of beer is £5, compared to £3.20 in nearby pubs.

One football club, recently promoted to the top league in England, is trying to improve their game-day revenue by upgrading the concession facilities in their stadium. The investment involved is as follows:

The project has an initial construction cost of £356,000.

They will depreciate these assets over 5 years, after which they expect to need to refurbish the concession areas again with the only limited residual value from the currently proposed concession (£45,000).

The net increase in cash flow expected for each of the five years is as follows:

Year 1: £80,000 Year 2: £100,000 Year 3: £120,000 Year 4: £140,000 Year 5: £140,000

The football club is considering this development. The alternative use of this capital is to invest in a new corporate hospitality facility which would yield an IRR of 12%.

Questions:

Explain which type of market structure are football clubs operating in. Why do you believe that to be true? 150 words max

What common factor might explain the high price paid for drinks at stadia and the high price paid by supporters for season tickets to watch top football clubs? 100 words max.

A football club is newly promoted to the top league in its country. What impact might this have on the position and the slope of the demand curve for it match-day and season tickets? How might this demand curve change for the following season if it was to survive relegation by finishing one place above the relegation zone? 200 words max.

Calculate the NPV for the planned refurbishment of the concession facilities at the football club. Would you recommend pursuing this project? Are there any other factors that would influence this recommendation? 300 words max