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Tuesday, April 21, 2009

On the price elasticity of the NBA

I teach price elasticity in my sports economics courses but I am sure the vast majority of the students forget about the concept not soon after the first exam. This is a shame because remembering the concept of elasticity would keep people from making silly assumptions about the implications of their actions.

Take this example from a Sports Business Journal article concerning NBA revenues during the just-ended 2008-2009 regular season:
Average attendance rose almost 1 percent and the flat gate revenue comes even after tickets were deeply discounted by most of the NBA’s 30 teams in an effort to fill seats.

Here's the idea. If demand is elastic then raising price will reduce revenue and lowering price will increase revenue. If demand is relatively inelastic then raising price will increase revenue and lowering price will decrease revenue. If demand is unitary elastic, then increasing prices will be revenue neutral and decreasing prices will be revenue neutral.

If the NBA deeply discounted prices and yet revenues remained flat what does this imply about the price elasticity of demand for the NBA? That at the league level demand is unitary elastic.

[Update: I will add that the limited increase in attendance might not be that surprising given that many teams play at or near capacity in relatively small arenas.

My original post assumed that the demand for the NBA had remained stable and that the lower price did not increase attendance very much because of inelastic demand. However it is possible, and perhaps probable, that the demand for in-arena NBA basketball fell during the previous season, that is the demand curve "shifted left." If this is the case then if the NBA had held prices higher they might have experienced a tremendous decline in revenue.

If the demand for the NBA had remained fixed and heavy discounting of tickets led to a very limited increase in attendance this would imply a very inelastic demand for the NBA which would actually indicate that the NBA should have raised price - which is counterintuitive given the economic downturn.]

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This is going to be on my Intermediate Micro Final exam.
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