Do High Salaries Lead to High Ticket Prices?

NEIL DEMAUSE

Ask baseball fans what peeves them most about the modern game, and most will say, “The players get paid too damn much money.” In a poll at the start of the 2005 season, the Associated Press asked Americans what they felt was baseball’s “biggest problem.” Coming in at number one, with 33 percent of the votes, was player salaries—and this mere weeks after the sensational congressional hearings into steroid use in baseball.

Probe a bit further, and many will say that their biggest objection to the $15-million-a-year player is that fans feel the pinch at the ticket window. (The cost of attending games, in fact, finished a close third in the AP poll, right behind steroids.) It’s a common refrain, especially during labor disputes: Baseball players make too much money and are making the games unaffordable.

The link between ticket prices and player salaries made headlines in 2000 when the Cincinnati Reds, on the verge of trading their star shortstop Barry Larkin to the New York Mets, instead reversed course and signed him to a three-year, $27 million contract extension. In announcing the move to the public, Reds CEO John Allen made clear that while the popular Larkin would now almost certainly finish his career in Cincinnati (he would ultimately retire a Red at age forty in 2004), there would be consequences: “We may do something nobody else has ever done. We’ve got to generate the revenues to pay for this.”

The “something” Allen spoke of soon became clear: an unprecedented midseason hike in ticket prices to Reds games, setting off a bitter public squabble over greed, big contracts, and Larkin’s aging bat. The deal was proof, critics said, of what fans had long feared: When teams hand out megabucks contracts, they pass along their costs to fans at the box office.

Or do they?

For the first three-quarters of the twentieth century, player salaries remained relatively low as owners used baseball’s reserve clause to force players to sign for whatever management was offering, unless they wanted to take up a career selling vacuum cleaners. (When home-run champ Ralph Kiner asked the Pirates for a raise in the 1950s, GM Branch Rickey famously snapped, “We finished last with you, we can finish last without you.” Kiner would later organize one of the first fledgling players’ unions.) With the nineteenth-century reserve clause tying players to their teams for life, players had only one negotiating option: Hold out and hope that your owner blinked before your next mortgage payment came due.

As a result, major league salaries remained remarkably low by modern standards through the first two-thirds of the twentieth century. In 1970, they averaged less than $30,000 a year. That works out to about $150,000 in today’s dollars—a good living, but hardly an extravagant one for players whose big-league careers averaged only a few years in length.

Then came arbitrator Peter Seitz’s decision in the Andy Messersmith case, which ruled that players could play out the “option year” in their contracts and become free agents, eligible to sign with any team. The owners promptly fired Seitz, but the genie was out of the bottle. The sudden free market in players sent salaries soaring, revealing the extent to which players had been underpaid in previous decades.

Since 1976, the first year of free agency, the average major league salary has skyrocketed from $51,501 to a once unthinkable $2,632,655. Even accounting for inflation, that’s a 1,395 percent increase. The average baseball player now makes about sixty times what the median U.S. family does. To put it another way, if the median U.S. household had seen its income rise at the same rate as big-league ballplayers, the average family would now be raking in nearly $650,000 a year.

Ticket prices have also leaped, if less dramatically. In 1976, the average baseball ticket would have set you back $3.45. By 2005, it had risen to $19.82. While much of that rise was due to inflation—$3.45 in 1976 had the buying power of $11.80 in 2005 dollars—even after accounting for inflation, that’s still an increase of 67.5 percent.

Let’s take a closer look at the relationship between ticket prices and player salaries over the past three decades (Fig. 6-1.1). Both salaries and ticket prices have gone up, true, but in anything but lockstep. In fact, in the first dozen years of free agency, as salaries more than tripled, ticket prices actually went down in inflation-adjusted dollars. It’s only been since 1990 that ticket prices have begun an upward march to match salaries, with a notable reversal in both following the 1994 strike.

FIGURE 6-1.1 Relationship between ticket prices and player salaries

So what’s going on here? If owners are being forced to pay through the nose for their players, why wouldn’t they pass along the costs to the ticket-buying public?

Economists have an answer for that. Baseball owners, like any business owners, are assumed to act as rational price-setters. (“Rational” here just means selecting the price that makes them the most money. It has nothing to do with making sensible decisions about, say, signing Eric Milton.) As such, they look at market research on how much fans are willing to pay to see games and then pick a price point for tickets that maximizes revenue, that price point being one where, if they tacked on another 10 cents, they anticipate losing more from fans staying home than they’d gain in additional dimes.

When costs of doing business go up, they can affect prices—witness, for example, debates in recent years over the impact of high oil prices on food and other goods that must be shipped by truck or plane. But it’s not always that simple. Let’s say, for example, you’re building an automobile. If the price of steering wheels goes up, you might rationally boost car prices to compensate, figuring that you’d rather have a bigger profit margin on fewer sales than sell more cars but make less money on each one.

Steering wheels, though, are a marginal cost: If you sell fewer cars, you have to buy fewer steering wheels to put in them. Player salaries, on the other hand, are a fixed cost: If you sell only ten thousand tickets for Tuesday night’s game, that doesn’t mean you can employ fewer outfielders. The price point you select for your tickets, then, shouldn’t change: If you’re already charging the price that will bring in the most money, then raising ticket prices in response to increased player costs would be foolish. Conversely, if you think you can get away with charging more for tickets, you’d be foolish not to do so, regardless of what you’re paying your players.

(Of course, there is another factor at work here: If paying through the nose for players improves your team, that will likely increase demand for tickets and allow you to raise prices. But that’s not “passing along” payroll costs, it’s just the natural increased demand you get with a winning ballclub—whether it’s thanks to big-money free-agent signings or to a bunch of stud rookies earning the minimum.)

As James Quirk and Rod Fort wrote in their 1992 sports business treatise Pay Dirt, “Nobody has to force an owner to raise ticket prices if he or she is fielding a successful team with lots of popular support and a sold-out stadium. Put another way, even if player costs did not rise, one would expect that ticket prices and TV contract values would rise in the face of increasing fan demand. On the other hand, if the team already is having trouble selling tickets, only sheer folly would dictate raising ticket prices.”

This, apparently, is what was happening in the early free-agent era. Salaries were skyrocketing, but interest in baseball remained fairly low by modern standards. Team owners thus concluded that fans were already paying all they were willing to pay to see Reggie Jackson, regardless of how much he was being paid. Instead, owners just ate the new payroll costs, taking it out of their own profits.

Around 1990, all this changed. Ticket prices showed little correlation with payroll in the late 1970s and 1980s, but since 1991, the two have been closely synchronized: For twenty-four of the thirty major league teams, ticket prices and payroll since 1991 are highly correlated.

What changed? As it turns out, something did happen around 1990—on June 5, 1989, to be precise—that caused baseball teams’ revenue to begin a sharp upward spike. That’s the day Toronto’s SkyDome opened to the public. Whereas previous new stadiums had focused primarily on increasing capacity, SkyDome put its architecture squarely where the money was, featuring 161 luxury suites and unprecedented vast concessions concourses. (The two SkyDome elements that drew the most comment, after the retractable roof, were the $7 hot dog and the hotel beyond right field where guests could watch the Jays play from their rooms—and, infamously, fans could occasionally watch the guests play from their seats.) Baltimore’s Camden Yards may have started the “retro” trend of modern steel-and-brick stadiums, but SkyDome was the first modern “mallpark.”

Within two years, the Jays became the first team in history to crack the four-million mark in attendance. Suddenly every baseball bean counter began calculating how to replicate the marvel of the north. “You take the suites, the signage, throw the media on top,” marveled Mariners owner Jeff Smulyan after a visit to the brand-new SkyDome, “and you have an economic juggernaut.” Neither baseball nor its ticket prices would ever be the same.

In the stadium mania that followed in the wake of SkyDome and its brethren, team execs discovered that fans would pay unprecedented prices to gawk at the new retractable roofs and sample the garlic fries. (See Chapter 6-2, “Are New Stadiums a Good Deal?” for more on this topic.) Here, for example, is a list of the twenty biggest single-season ticket increases since 1991 (bold signifies first year of a new stadium):

1. Det	2000	103.0 percent
2. SF	2000	75.2 percent
3. Pit	2001	65.3 percent
4. Phi	2004	51.3 percent
5. Hou	2000	50.6 percent
6. Cin	2001	43.5 percent
7. Mil	2001	39.2 percent
8. Cle	1994	38.6 percent
9. Tex	1994	35.2 percent
10. Ana	2003	35.5 percent
11. Col	1995	34.3 percent
12. SD	2004	31.9 percent
13. ChW	2001	31.0 percent
14. Atl	1997	31.5 percent
15. Bal	1997	29.5 percent
16. StL	1997	28.4 percent
17. Sea	1999	27.2 percent
18. TB	2001	25.0 percent
19. NYY	1997	25.9 percent
20. Oak	2001	24.0 percent

Eight of the top-ten single-season price hikes—and ten of the top twelve, and eleven of the top fourteen—came when a team was moving into new digs. (The number-one team without a new stadium is the 2001 Cincinnati Reds, who likely sought a way to defray some of the dollars being paid to fan favorite Ken Griffey Jr. with the star center fielder entering his second season with the club.) And the ’99 Mariners might have been in the upper echelon had Safeco Field not opened in July, meaning their numbers were watered down with half a season at the Kingdome; ticket prices rose another 23.3 percent in the Mariners’ first full season at Safeco in 2000.

The result was an unprecedented boon for baseball owners, whose revenue soared from $1.35 billion in 1990 to $4.27 billion in 2004. Players benefited as well. For while rising player salaries may not drive up ticket prices, the reverse is not necessarily true. More ticket revenue means more money in the pockets of owners, money that quickly found its way into the pockets of the Barry Bondses and Alex Rodriguezes (not to mention the Pat Meareses and Derek Bells) of the baseball world. Even more importantly, more expensive tickets make the rewards of spending on players much greater: If A-Rod puts an extra half-million fannies in the seats each season, you can afford to spend more on him if those fannies are sitting in $30 seats as opposed to $10 ones.

That said, we can’t pin all the blame for ticket-price hikes on new stadiums: The twelve teams that did not move into new homes raised ticket prices by an average of nearly 50 percent, after inflation, between 1991 and 2005. Clearly something else had changed. Fans became more willing—or more able—to pay higher prices to attend a baseball game.

The easy explanation is simply that “demand for baseball rose.” Unless you’re a particularly literal-minded economist, though, that doesn’t explain much. For that matter, recent decades have seen the steady decline of baseball’s popularity compared to other sports: By 2001 a mere 12 percent of adults called baseball their favorite sport, a distant third to football and basketball.

Yet interest in sports overall—or at least spending on sports—has gone through the roof. As University of Chicago sports economist Allen Sanderson notes, this has driven up revenue, and ticket prices, across the board: “Ticket prices have also gone up rather dramatically at big-time college football and basketball programs, and salaries haven’t changed at all.”

Some of this, certainly, was the result of the 1990s economic boom, which put more money in the pockets of the affluent fans who are increasingly sports’ target demographic. “Certainly people in the upper half of the income distribution the last twenty years have done quite well,” said Sanderson. “Those in the lower ranks have not, but those are not the ones that are going to sporting events.”

This flood of money into the upper echelons of U.S. society was unprecedented in recent memory: While the median U.S. household gained $3,400 in yearly after-tax income from 1979 to 1997, the average household in the top 1 percent of the population made a whopping $414,000 more each year. Compounding the effect were the massive income-tax cuts put in place during the 1980s, when the top tax bracket fell from 70 percent to 35 percent, leaving wealthy fans with refund checks that were handy for buying up all those new luxury suites and club seats.

The result is that grandstands are now markedly more exclusive: The only demographic segment to attend more games in the ’90s than the ’80s was households earning more than $50,000 a year. In the late 1990s, economists John Siegfried and Tim Peterson spent fifteen months poring over consumer-price-index surveys to determine the income levels of buyers of tickets to sporting events and found that the average ticket buyer’s income was nearly twice the national average. And, notes Siegfried, since the survey excluded corporate buyers and luxury-suite holders, the true figure was likely even higher.

In effect, lower-income fans were being squeezed out by the big spenders, for whom dropping $75 to watch a ballgame from a padded seat with waiter service was suddenly not unreasonable. Sanderson describes this process as “trading up.” He explains, “Just as we trade up from Sears or Penney’s to Nordstrom’s, we’re trading up in that we want to see a game, but we want to see a game while eating a better brat.” Another way to look at it is that when they design their new stadiums, the teams themselves are “trading up” from bleacher bums to the well-heeled.

In another industry, this increase in high-end demand would lead to an increase in supply—as it apparently did in, for example, the movie business, where competition from new theaters and the home video market left movie ticket prices rising no faster than inflation throughout the 1990s. Of course, that doesn’t work in the closed world of baseball: You can open another two hundred Nordstrom’s, but you can’t add two hundred teams to the AL East.

The same can be said, incidentally, for those other hallmarks of modern baseball, the $7 beer and high cable-subscription rates. Just like ticket prices, these are unaffected by fixed costs like player salaries—fans aren’t more willing to open their wallets at the concessions stand just because the third baseman got a raise—but do reflect the sport’s monopoly status: If you want to watch baseball on TV or guzzle watery Bud at the ballpark, there’s only one game in town. So when fans’ wallets are newly abulge, prices can be expected to rise accordingly.

So if you’re angry about those $30 nosebleed tickets, better to blame Ronald Reagan or the nation’s ongoing love affair with garlic fries and cupholders than player salaries. After all, look what happened in the wake of the Reds’ Larkin fiasco. The team held off on price hikes until the end of the season, then jacked them up by 43.5 percent the following off-season—only to see attendance plummet from 2,577,371 to 1,879,757, wiping out any potential gains in revenue.