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Sports economy, Porter and Thomas

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A. Read (and skim) the following portions of the Porter-Thomas paper, "PUBLIC SUBSIDIES AND THE LOCATION AND PRICING OF SPORTS," working paper, 2007.

READ: Abstract
READ: Introduction (pp. 1-2)
SKIM: Section II: Subsidy Bidding and the Invariance of Team Location (pp. 3-11)
READ: Section III: Team Owner Pricing Behavior with Public Subsidies (pp. 11- top 14)
SKIM: Section III.2 Team Owner Pricing Behavior with Public Subsidies (pp. 14-22).
READ: Concluding Remarks (pp. 23-25)

1. Explain, using managerial economics, why sports economists believe ticket prices are too LOW. No more than 75 words, please. You can do an excellent job with 40 - 50 words if you are concise.
2. For any general profit-maximizing firm with market power (i.e., a price-setting firm, such as Microsoft, Toyota, or Starbucks), why do we NOT expect to see on an ongoing basis shortages of goods or services provided by these firms? Explain briefly (40 - 50 words would be about right).
3. Explain why Porter and Thomas think sport ticket prices that are so low as to cause persistent shortages are in fact rational, profit-maximizing pricing strategies. No more than 75 words please. You can do an excellent job with 40 - 50 words if you are concise.

B. Discuss a situation in which either your firm used cost-plus pricing or you did business with a firm that used cost-plus pricing. Explain why this was a poor choice for the firm's price making decision. What should the firm have charged to maximize profits?

Be sure to use the ideas of marginal cost versus average cost in your discussion.

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Solution Preview

Sports economists believe that ticket prices are too low because empirical studies show that the ticket prices were lower than what would be expected from profit-maximizing team owners. From empirical evidence, the economists found that this was a deliberate strategy of team owners. Professional sport teams purposefully set ticket prices in the inelastic region of demand. This leads to persistent occurrence of excess demand. For example, half of NFL teams advertise their season ticket waiting list.
For any price setting firm such as Microsoft or Toyota, we do not expect to see a shortage on an ongoing basis because these firms price their products ...

Solution Summary

The response provides you a structured explanation of how ticket prices are fixed in sport events . It also gives you the relevant references.