## Monopoly

Read this chapter to learn the characteristics, workings, and effects of the monopoly model. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It" problems at the end of each section before checking your answers.

### 3. The Monopoly Model

#### 3.1. Case in Point: Profit-Maximizing Sports Teams

Love of the game? Love of the city? Are those the factors that influence owners of professional sports teams in setting admissions prices? Four economists at the University of Vancouver have what they think is the answer for one group of teams: professional hockey teams set admission prices at levels that maximize their profits. They regard hockey teams as monopoly firms and use the monopoly model to examine the team's behavior.

The economists, Donald G. Ferguson, Kenneth G. Stewart, John Colin H. Jones, and Andre Le Dressay, used data from three seasons to estimate demand and marginal revenue curves facing each team in the National Hockey League. They found that demand for a team's tickets is affected by population and income in the team's home city, the team's standing in the National Hockey League, and the number of superstars on the team.

Because a sports team's costs do not vary significantly with the number of fans who attend a given game, the economists assumed that marginal cost is zero. The profit-maximizing number of seats sold per game is thus the quantity at which marginal revenue is zero, provided a team's stadium is large enough to hold that quantity of fans. This unconstrained quantity is labeled Qu, with a corresponding price Pu in the graph.

Stadium size and the demand curve facing a team might prevent the team from selling the profit-maximizing quantity of tickets. If its stadium holds only Qc fans, for example, the team will sell that many tickets at price Pc; its marginal revenue is positive at that quantity. Economic theory thus predicts that the marginal revenue for teams that consistently sell out their games will be positive, and the marginal revenue for other teams will be zero.

The economists' statistical results were consistent with the theory. They found that teams that do not typically sell out their games operate at a quantity at which marginal revenue is about zero and that teams with sellouts have positive marginal revenue. "It's clear that these teams are very sophisticated in their use of pricing to maximize profits," Mr. Ferguson said.

Not all studies of sporting event pricing have confirmed this conclusion. While a study of major league baseball ticket pricing by Leo Kahane and Stephen Shmanske and one of baseball spring training game tickets by Michael Donihue, David Findlay, and Peter Newberry suggested that tickets are priced where demand is unit elastic, some other studies of ticket pricing of sporting events have found that tickets are priced in the inelastic region of the demand curve. On its face, this would mean that team owners were not maximizing profits. Why would team owners do this? Are they really charging too little? To fans, it certainly may not seem so!

While some have argued that owners want to please fans by selling tickets for less than the profit-maximizing price, others argue they do so for possible political considerations, for example, keeping prices below the profit-maximizing level could help when they are asking for subsidies for building new stadiums. In line with the notion that team owners do behave like other profit-maximizing firms, another line of research, for example, that proposed by Anthony Krautmann and David Berri, has been to recognize that owners also get revenue from selling concessions so that getting more fans at the game may boost revenue from other sources.