Ticket prices shouldn't be set by the free market: don't take our word for it, here's Dr Chris Bojke senior research associate at University of York's Centre for Health Economics looks at "addictive good" provided by football clubs...
Despite the increasing high cost of attending football matches, it hasn’t gone unnoticed that demand, as measured by match-day attendance has remained pretty stable or even increased over time.
On one hand it is possible to adopt a cold hard economic perspective and argue that the persistently above inflation increases in ticket prices may better reflect the value of a match to fans: fans are under no obligation to buy tickets, so if the cost wasn’t worth it to them, then they could simply spend their money elsewhere.
If demand remains stable or even increases then current prices must be lower than the value fans attach to games. Indeed the question has been asked that, if the demand is there why shouldn’t clubs be able to charge what they like?
And to some extent, why not? We do live in a market-orientated economy where prices are generally set by private firms without restriction. The underlying rationale being that the twin forces of competition and choice lead to the ‘invisible hand’ of the market producing the right products at an efficient price. A price that allows firms to make a reasonable profit without making supernomal profits at the expense of consumers.
Funnily enough whenever I hear that question being posed, it’s often from individuals who I suspect are playing the devil’s advocate.
The perception is that there must be a good rebuttal to that argument and yet the argument still seems to stand. There is much discussion on the fairness of prices and even the PM has chipped in claiming rising prices are a problem, but although they entirely reasonable objections they don’t really seem to challenge the original argument in its own cold hard terms.
So the objective of this blog is to attempt to tackle the argument in purely economic terms. And I do think there are good plausible, logical economic arguments (not one, but two) as to why clubs should not be allowed total free reign in setting prices.
Furthermore there are clear precedents in terms of these arguments leading to regulation and other restraints on behaviour in other sectors of the economy.
Some services, like national defence or health services or education are overwhelmingly provided by the public sector and even some commercial services like rail operators are subjected to regulation. And the reason for this is that economists believe that in some circumstances the unfettered operation of markets does not lead to optimal outcomes; that some specific characteristics of markets might lead to the mechanisms of competition and choice breaking down. These characteristics are known as market failures.
The next step in the counter-argument then is to identify whether any such market failures exist in the market for attendance at football matches.
The real key to this counter argument is understanding the nature of the relationship between the paying fan and the ‘product’ and even defining what the product is itself.
Is it, for example, a game of football, is it a Premier League game of football, or is it a specific club’s matches that are followed?
And this may be different depending on whether we are talking about people who generally watch matches at home on TV and those who spend money attending games. But we are talking about fans who attend matches in person.
So imagine a typical Saturday morning in the home of a fan who attends Liverpool games. Does that fan open up their paper and scan the list of the games being played nearby in deciding which game to attend? Do they seriously consider going to watch Everton or Man City or maybe even Tranmere as an alternative to going to Anfield? Or is it more a case of attending the Liverpool game or nothing?
If it is the latter then the product is not any old game of football, nor even a Premier League game, but specifically a game of football involving Liverpool. And to that extent it is clear that Liverpool Football Club are the monopoly suppliers of (home) games involving Liverpool.
Ok I suppose there are away games, where the other team becomes the monopoly suppliers of Liverpool football at that time. But the point is that, at any point in time, there is just one supplier of the product or a cartelized oligopoly at best.
At that point in time there is no choice of alternative Liverpool games that a fan can pick from. And this is true for all clubs.
My argument is that the vast amount of fans who attend football matches attend to watch their club. There is therefore no opportunity of real choice and therefore no competition - we cannot assume a free-reign market will lead to the optimal outcomes.
A monopoly supplier is a classic market failure. And we can observe these theoretical concerns being played out in real life: clubs to continue to increase prices above what is considered economically efficient or fair without risk of generating entry into the market by rivals. This abuse of monopoly power is a key driver of the need for regulation.
There might be also be another, albeit related, market failure to consider.
Consider Leicester City’s astonishing season. I must admit I get certain pleasure from seeing a club outside the big four give them all a good run for their money in this year’s league. But I bet I don’t get as much pleasure from this as Leicester City fan does.
And what is more, I bet the average Leicester fan who has followed them for years and years and suffered Premier League struggles and relegations and enjoyed successful promotion campaigns gets more enjoyment than a Leicester City fan who has just started watching them this season.
Would it be plausible to argue that, on average, a fan who has built up a stock of affiliation with a club over many seasons and an accumulation of pain and joy will get more from the next Leicester City game than a fan who has just started watching them? i.e. value or utility from current consumption is partly a function of previous consumption?
This may seem a rather obscure point to labour, however current utility being partly a function of previous consumption is, to an economist, a defining feature of what may be classed as an addictive good.
It might not be what the general public would consider a feature of addiction, but hey, we are producing an economics based response to an economic argument.
Typically most goods and services considered addictive are also considered harmful (smoking, alcohol consumption and gambling) and therefore have a twofold rationale for regulation, however the nature of addiction itself is sufficient for a market failure to occur even for non-harmful goods.
The argument being that there is a non-monetary cost to giving something up you are addicted to, going cold-turkey can be a joyless experience.
Again clubs can attempt to extract supernormal profit by exploiting the addictive nature of the good; the reluctance of fans to undergo cold turkey allows them to charge higher prices.
And perhaps we observe elements of this in the recent walk out on 77 mins of the Liverpool vs Sunderland game by Liverpool fans protesting against proposed ticket price increases. If I objected to my local landlord putting an extra 5p on my favourite lager, I might buy a different brand of lager or not buy at all – I wouldn’t buy a pint, drink three quarters of it and then walk out in protest, only to come in next Saturday and buy another pint.
Why don’t Liverpool fans simply not go to the next game? It is perhaps the only way that consumers can put pressure on monopolies to lower prices. Is the walk out a signal of protest in full recognition that they simply can’t give up going to games?
So next time you hear the cold hard economics based question of ‘if the demand is there why shouldn’t clubs be able to charge what they like?’ Here is my suggested cold hard economics based response – because there are market failures, market failures which we know can cause the free market to generate suboptimal outcomes for consumers.
Specifically clubs are monopoly suppliers (or at best, part of a cartelised oligopoly) of an addictive good. The persistent rises in the price of tickets above and beyond inflation is indicative of clubs exploiting these market failures. Either condition could be sufficient for intervention/regulation, but in tandem there is an especially strong prima facie economic case for not allowing prices to be set in a free market, to not allow clubs to charge what they want.
The FSF blog is the space to challenge perceived wisdom, entertain readers and inform our members. The views expressed are those of the author and they don't necessarily represent FSF policy and (pay attention journalists) shouldn't be attributed to the FSF.
Thanks to Action Images for the image used in this blog.