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Sunk Costs, Market Structure and Football Clubs

January 19, 2017 Leave a comment

Over the holidays I read Stefan Szymanski’s book “Money and Football – A Soccernomics Guide”. Szymanski also co-authored “Soccernomics” with Simon Kuper. There were various references to economic theory through the book which I will refer to on this blog.

Market Dominance

Dominance in a market is often associated with the lack of competition whether it be due to monopoly power, predatory pricing, the scale of investment etc. However this is not the case when it comes to football. Szymanski mentions the fact that there are 27 professional teams withn a 50 mile radius of Manchester Utd. If fans don’t like United, there are plenty of alternatives as there are in Madrid which has 5 professional clubs. In some countries football rivals play in the same stadium:

  • In Germany: Bayern Munich and TSV 1860 Munich,
  • In Italy: Inter Milan and AC Milan,
  • In Switzerland: FC Zurich and FC Grasshopper
  • In Brazil: Botafogo, Flamengo and Fluminense

Football Clubs.jpgDominance in markets usually occurs because of the initial investment required to compete in the first place – set-up costs. If you look at the railway industry (which could be said to be a natural monopoly) the cost of putting down new train tracks by the existing ones or a new line would be excessive and the ability to cover these costs would very difficult. Any benefit that may arise from competition would be diminished by the cost of duplication.

Dominance is easy to explain if there are very large set-up costs, which, once spent, cannot be recovered other than by operating in the industry. Economist refers to these costs as Sunk Costs.

Dominance in a market can also occur in markets where there are less sunk costs. Take for instance the soft drinks industry as an example. It remains relatively inexpensive to set-up a production plant to bottle soft drinks but Coca-Cola dominates the world market with 42% market share, followed by Pepsi with 28%. Their dominance is through advertising which makes up the majority of the sunk costs. Advertising is an example of ‘endogenous’ sunk costs which are determined by the firm as opposed to ‘exogenous’ sunk costs which are determined by technological requirements.
Premier League Players.jpgIn professional football the focus is on player investment rather than advertising, where the big clubs are those that spend heavily on players and win league championships. Teams that win are more likely to attract a larger fan base and greater revenue. Szymanski states that the big difference between football and soft drinks is that the pattern of dominance looks the same in small markets. For instance clubs in the English Division 2 (Division 4 in the old days) still stay in existence mainly because they operate in a different market than the Premiership teams. Of the 88 clubs in the English Football League in 1923, 85 still exist, and most of them still play in the 4 English Divisions. Also those clubs in the lower Division do benefit from intense local loyalty especially through tough times with performance. When clubs get relegated to the Championship from the Premier League, although they lose revenue from TV rights their fan base remains fairly constant. However a lot of these clubs will find it hard breaking into the dominant group – Manchester City, Manchester Utd, Liverpool, Arsenal, Chelsea, Spurs – unless they receive significant funding from an investor who doesn’t expect to see a financial return or have an exceptional season without high profile players like Leicester City who won the Premiership in 2015/16.

Unlike most business in which loss-making firms shut down or merge into other businesses, football clubs almost always survive. This does not prevent dominance, but unlike most industries, it does mean that the pattern of dominance tends to look the same everywhere. Source: Szymanski

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Globalisation of the football labour market = demise English National side?

April 15, 2015 Leave a comment

EPL foreign playersGreg Dyke, the chairman of Football Association, has stated in the media that the English Premier League and Championship are not giving young domestic talent sufficient opportunities at the highest level of English football. He declared that the EPL was gravitating towards being “owned by foreigners, managed by foreigners and played by foreigners.”

Football has one of the most globalized markets for skilled labour and the EPL has embraced the benefits of open borders. Greg Dyke’s concern is plain to see:

There are 500 player jobs in the EPL – 20 teams x 25 players
1990’s – 345 (69%) of the 500 player jobs were filled by English players
Today – 185 (37%) of the 500 player jobs are filled by English players

This is contrast to the La Liga (Spanish League) where 61% of the players were Spanish and 59% of the Bundesliga (German League) were German. It is ironic that both the national sides of Spain and Germany have been most successful in recent times:

Spain – European Champions – 2008 and 2012. World Cup Winners 2010
Germany – World Cup Winners 2014.

Furthermore in the English second tier, the Championship, has seen English players account for less than 50% of the total minutes played during the early months of the current season as calculated by the BBC.

Solution to the English Game
Dykes has lobbied government to impose new limits on the supply of foreign players, by making it harder to get work permits. Furthermore he wants to somehow persuade teams to contract more English players in their squads of 25. In economics this is know as import substitution as Dykes is trying to encourage the development of the domestic industry by imposing protectionist policies. But as pointed out by the New York Times, England is not developing a new industry as football was invented there.

Are foreign players bad for the English game?

The money that it brings into the economy through sponsorship, television rights, shirt sales etc, is significant. Furthermore the English players that do play in the EPL are much better off that their predecessors:

2014/15 season – EPL average salary = £2.3 million
2014/15 season – Championship salary = £486,000
1992/93 season – average salary = £140,000 (adjusted for inflation)

Although fans are arguably watching a very high standard of football in the EPL it is ironic that no side from the EPL made the Quarter-Finals of the European Championship.

The Global Game
Globalisation has increased the competitive balance of international competitions like the World Cup, as players from smaller and less affluent countries, such as Ghana and Uruguay, have more opportunities at the game’s highest levels. That suggests England and other traditional powers are losing ground, in relative terms, because they now face stiffer competition.

Source: New York Times – Globalisation Under attack, on the Soccer Field.

Categories: Labour Market, Sport, Trade Tags: ,

World Cup defeats = declining Stock Markets

July 10, 2014 Leave a comment

London Business School Professor Alex Edmans has written an academic paper with Diego Garcia and Oyvind Norli which shows that international football defeats lead to declines in the national stock market index.

Edmans on his blog looked at how this theory has played out in the 2014 World Cup. There has been evidence of stock market declines after defeats in this World Cup. Across all countries with a stock market index, a defeat has led to the index falling by 0.2% faster than the MSCI World index. Moreover, defeats by the “big seven” countries (notably England, Spain, and Italy) have led to declines of 0.5%. Out of the 36 defeats by countries with an active stock market, 24 have been followed by market declines faster than the MSCI World. Below is data from Edmans’ blog and a humourous talk about his paper.

World Cup Results and Stock Markets

Avoid the Germans in a Penalty Shootout

July 7, 2014 Leave a comment

A particular interest of mine is game theory and penalty shootouts – see Game Theory Lesson: Man Utd v Chelsea Penalty Shootout. This involves studying the alternative strategies a person may choose to adopt depending on their assumptions about their rivals’ behaviour. The most significant research into penalty kicks has been done by Steven Levitt (co-author of Freakanomics) who co-authored a paper on mixed strategies when players are diverse in their decision making and studied 459 penalties in the Spanish and Italian leagues. Another economist Ignacio Palacios-Huerta analysed 1417 penalty kicks from several European countries during the period 1995-2000.

Approaching the business end of the Football World Cup and you have to have some sympathy for the Costa Ricans who celebrated after extra-time with the scores being tied – assuming that this was their plan from the commencement of the game and that they fancied their chances in the shootout. However why do some teams do better at penalty shootouts than others? The Economist looked at this recently and came up with the following:

1. Defeat is habit forming – players who miss regularly become fatalistic
2. Countries that are collectivist in nature rather than individualistic do much better – mindful of their public image
3. Research shows that star players tend to miss more than your average player – they feel the pressure
4. Who goes first is important as players are far more likely to miss a penalty if it to stay in the contest rather than one that will win it. The majority of the time the team going first wins the shootout.

Below is a chart from The Economist which shows that England have struggled at this part of the game but the Germans, as you would expect, are very efficient. As for the Czech Republic they have yet to miss a penalty.

Penalty Shootout stats

Psychological Preparation for Penalty Shootouts – Academic Paper

A recent piece of research from the British Association of Sport and Exercise Sciences addresses how you should prepare for Penalty Shootouts.

Players who take less than one second to place the ball on the penalty spot score on about 58% of their penalties whereas those who take longer score on about 80% of their penalties (Jordet et al., 2009).

Similarly, taking about a second or more to respond to the referee’s whistle to initiate the shot is associated with a higher probability of scoring than immediately rushing towards the ball (Jordet et al., 2009).

Developing and practising a suitable pre-shot routine is a potentially useful way to guide these timings and help protect performance under pressure. Indeed, recent research by Wood and Wilson (2012) has suggested that learning a routine involving a gaze control element (look at the point where you want to shoot prior to the run-up) helped penalty takers in a shootout task to be more accurate, maintain effective visuomotor control and increase perceptions of psychological control and contingency.

In the Shootout:

1. Don’t rush: Place the ball properly on the spot and take a breath while focusing on where you intend to shoot, before starting the run-up. Taking a deep breath is likely to ease feelings of anxiety and provides a temporal cue to ensure that sufficient processing of target-related information is enabled.
2. Trust your technique and routine – pick a spot and hit it.
3. Celebrate! It will help your team-mates who have to take the subsequent penalty kicks.

With the semi-finals coming up you’ve got to fancy the Germans if it goes to a penalty shootout.

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