Tuesday, November 9, 2010
Posted by D. Daniel Sokol
Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich), Tobias Duschl (Institute for Strategy and Business Economics, University of Zurich), Egon Franck (Institute for Strategy and Business Economics, University of Zurich), and Markus Lang (Institute for Strategy and Business Economics, University of Zurich) provide A Contest Model of a Professional Sports League with Two-Sided Markets.
ABSTRACT: This paper develops a model of a professional sports league with network externalities by integrating the theory of two-sided markets into a contest model. In professional team sports, leagues function as a platform that enables sponsors to interact with fans. In these league-mediated interactions, positive network effects operate from the fan market to the sponsor market, while negative network effects operate from the sponsor market to the fan market. Clubs react to these network effects by charging higher (lower) prices to sponsors (fans). Our analysis shows that the size of these network effects determines the level of competitive balance within the league. Traditional models, which do not take network externalities into account, under- or overestimate the actual level of competitive balance, which may lead to wrong policy decisions. Moreover, we show that clubs benefit from stronger combined network effects through ! higher profits. Finally, we derive policy recommendations for improving competitive balance by taking advantage of network externalities.