Monday, November 28, 2011

Soared in Value? Probably Not As Much as Indicated

Freakonomics reports on this Pittsburgh Post-Gazette article claiming that Steelers personal seat licenses have increased by as much at 1,400 percent. While I won't deny that they have probably increased in value, this is an overstatement. Here's why.

They compare the current secondary market prices to those posted by the Steelers in 2001. The first mistake here is not understanding that most teams price to sell out (in the inelastic portion of demand). This is also likely true with PSLs. There are a few reasons for this, one being that they maximize profits not just on ticket sales, but also on concessions and memorabilia within the stadium. Secondly, there is also some economic theory that places like sports and restaurants keep prices low, as their product depends on other people also liking it and consuming it (and they have a fixed supply). There could be evidence of lashback if the team gets lots of public funding as well, and then turns around and soaks up lots of consumer surplus with PSLs. They want to keep some good will, though this is hard to show in practice. Whatever the reason, it invalidates the direct comparison of Steelers' prices for PSLs and the prices on the secondary market.

In 2001, when the Steelers sold their PSLs for Heinz, it is VERY likely that the market would have paid significantly more than what they were going for. One could verify this by looking at 2001 sales of PSLs on the secondary market. While this still made them a great investment for the savvy ticket seller, it means that the demand for PSLs likely did not increase fourteen-fold in the past 10 years. One would have to compare the secondary market for these then to the secondary market for them now.

The second thing they didn't do (at least they make no indication of it) was adjust for inflation. This again makes the numeric comparison invalid. 2011 dollars are worth less than 2001 dollars. Let's use 2010 dollars as an example. They're worth about 81% of what 2001 dollars were. So you have to first discount this amount before making a real comparison of value or changes in demand.

All in all, it's likely that the Steelers have seen some great financial return on their success over the past 10 years. However, it's just not nearly as large as the Pittsburgh Post-Gazette seems to want to indicate. I guess those two losses to the Ravens this year left them looking for something positive to report on (*wink* *wink*).

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