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CBA: Ticket prices and player salaries

Sunday, July 04, 2004

It's an argument you hear often from NHL ownership. Escalating player salaries force teams to jack up the prices fans have to pay to attend NHL hockey games. Owners insist if they could stem the rapid growth in salaries they could make attending games more affordable for the average fan.

"The current business model doesn't work. It's extremely clear in our market that increasing ticket prices to meet growing player salaries is not the answer," Washington owner Ted Leonsis said last year on his team's official web site.

Last season Boston Bruins owner Jeremy Jacobs chimed in with this: "Ticket prices are too darn high. Our prices are high. We've been chasing away the fans with it over the last couple of years. or every dollar that we've increased ticket prices, we've spent more than two on a player. I hope that the commissioner in the next CBA is able to reach an agreement that allows us to stabilize the ticket prices and perhaps even lower them because I think we are chasing away a lot of our ticket base."

There was this from Dallas Stars president Jim Lites earlier this year as he announced a reduction in the prices of some tickets from the 2004-05 season: "We are taking these steps now to fulfill our pledge to our fans to reduce the burden escalating payrolls have put on ticket price. Our hope is that a new collective bargaining agreement will bring stability to the league."

That argument will usually bring a sharp rebuke from NHLPA head Bob Goodenow, who argues that ticket prices are set by the good old economic principle of supply and demand.

"Ticket prices are set on supply and demand. So it's the owners who set the ticket prices based on the demand. They do so as smart businessmen to maximize the revenue yield from tickets that are sold," Goodenow once told the Toronto Sun. "As we all know, teams will go about repricing the house, as they say -- tiering certain tickets at certain locations at certain levels. Fans set the ticket prices based on their interest and their demand for the tickets.

"Once the tickets are sold and the revenues come in to the clubs, then the clubs, as businesses, sit down and set their budgets and determine what they're going to pay players. Both of those functions happen more or less simultaneously, but ticket prices are not set based on what the salaries are. Ticket prices are set based on supply and demand as provided by the fans in each market."

Toronto Sun columnist Al Strachan once put it this way: "As for ticket prices, they reflect what the market will bear. The Maple Leafs have the highest prices in the league for one simple reason. People will buy them at that price. Surely you don't think that ticket prices will go down if salaries are reduced, do you? If you're that stupid, you could become a judge in this country."

Many economist don't buy the owners' argument either. They call it a myth. Among them is Dr. Patrick Rishe, a sports economist at Webster University in St. Louis.

"Owners want to place the blame of players' salaries on the players, so they want to get the ire of the fans off the owners and push it onto the players. So they make this argument. It just doesn't hold water," Rishe said during a phone interview. "When you talk about what determines ticket prices, it's not player salaries. Saying that it is related to player salaries just doesn't fly because a lot of times teams have set their ticket prices before they know what they know what their payroll is going to be for the next season."

Rishe said that ticket prices are determined by demand. He cited one example where he thinks payroll may have an impact on ticket prices, but even that one is on shaky ground.

"The only time that you could even say that it's related to player salaries is if a team during a particular off-season before they've set their prices for the next season goes on a spending spree in the free agent market and they bring in a lot of talent," he said. "Then they feel like 'We brought in all these guys. We've got to try to recoup some of these costs. Maybe charge a little bit more because of that reason.'

"Even then you could argue that it's not necessarily because of the cost they spent on those players, but that it's more demand related. Pricing in sports is demand related, not cost related."

Rishe said there a few things that can affect demand. One of the biggest factors is when a team moves into a new playing facility.

"Typically speaking, when you look at the factors that determine ticket prices in sports invariably the number one determinant of a changed ticket price is a new stadium. A new stadium impacts the demand for the product because people want to see the new stadium."

For example, when the Colorado Avalanche moved from McNichols Arena to the Pepsi Center for the 1999-2000 season, ticket prices shot up 19.9 percent, according to Team Marketing Report.

That same season the Los Angeles Kings moved into the Staples center and ticket prices went up 18.8 percent. At the Carolina Hurricanes new arena that season, tickets prices rose 24.1 percent.

But those number paled in comparison to tickets at the new Air Canada Centre in Toronto, where Team Market Report said tickets to see a Maple Leafs shot up 64 percent in the team's first full season in the new building.

Rishe said another reason demand increases is a an obvious obvious one -- recent success.

"Anytime a team wins a championship you are going to look at ticket prices going up at least ten percent, in some cases 20 or 30 percent," he said.

Rishe once wrote this in an article for the St. Louis Business Journal: "Success makes fans more fanatical, and hence, less sensitive when it comes to higher prices. In our economics class we would say that success makes fan demand for tickets more inelastic."

Case in point -- the New York Rangers. They've have one of the highest payrolls in the league for years. But they've held the line on ticket prices. Why? The lack of on ice success.

And there's no success like a trip to the playoffs, especially like a deep run to the playoffs, said Rishe.

"Why do you think ticket prices for playoff hockey (or any sport in the playoffs) are higher than they are for the regular season, and why do ticket prices get more expensive the deeper in the playoffs the team advances? Intensity of demand heightens, and hence, teams and leagues realize a higher price will be paid," he wrote in that St. Louis Business Journal article.

But Lites, the Stars president, might beg to differ. Sure demand plays a role. But the NHL is unique among the major team sports. For example, the Stars had a plan to hike playoff ticket prices during the 2003 playoffs. Here's how it broke down. The plan was for a $20 upper-deck seat in the regular season to stay at the same price for round one. It would increase to $35 for round two, $60 for the Conference Finals and $110 for the Stanley Cup Finals.

The Stars didn't make it past round two, but Lites defended the hike at the time, putting part of the blame on the team's high payroll and part on the reality of the league's economics. Without the revenue streams of other sports, NHL franchises rely heavily on gate receipts.

"We do not make money unless we penetrate two rounds into the playoffs," Lites said at the time.

According to the Levitt report gate receipts, both for the regular season and playoffs, made up 49.9 percent of NHL revenues in the 2002-03 season. That's a far higher percentage than the NFL, NBA and Major League Baseball.

Sure, the NHL may rely more heavily on gate receipts. But that doesn't change the belief among economists that demand still is the overriding principle that dictates prices.

As Rishe once wrote in an article, "Ticket prices increase as fan preference to watch their team increases, and teams adjust their prices in accordance with their perception of just how insensitive their fans are to higher prices."

And in our interview with Rishe, he offered one more piece of evidence that ticket prices are demand driven. It's called variable pricing. The theory behind it is pretty simple. No two games are created equal.

In today's NHL a against Chicago is a lesser draw than, say, tilt against Detroit. It makes sense to charge fans more to see the Red Wings, one of the better teams in the league.

"That is demand based," Rishe said. "Once the players' salaries are fixed during the off-season that variation of pricing isn't because players' salaries are fluctuating. It's because the demand to see certain games is fluctuating."

And many economists will argue that no matter what happens with the next CBA and how it affects player salaries, ticket prices will still be determined the old fashioned way -- by demand and how much owners think fans will be willing to pay.

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