Final Paper: The Market for Professional Basketball
Toward the end of the 1970s, the NBA seemed on the brink of collapse. Attendance had
sunk to little more than half the capacity. Some teams were nearly bankrupt. Championship
games didn’t even merit prime-time television coverage. But in the 1980s, three superstars
turned things around. Michael Jordan, Larry Bird, and Magic Johnson added millions of fans and
breathed new life into the sagging league. Successive generations of stars, including Stephen
Curry, Kevin Durant, and LeBron James, continue to fuel interest.
Curry, Kevin Durant, and LeBron James, continue to fuel interest.
Since 1980 the league has expanded from 22 to 30 teams, and attendance has more than
doubled. More importantly, league revenue from broadcast rights jumped 140-fold from $19
million per year in the 1978–1982 contract to $2.7 billion per year in the current contract, which
runs to 2025. Popularity also increased around the world as international players, such as Dirk Nowitzki from Germany and the Gasol brothers from Spain, joined the league. (Basketball is now the most widely played team sport in China.) NBA rosters include more about 100 international players. The NBA formed marketing alliances with global companies such as Coca-Cola and McDonald’s, and league playoffs are now televised in more than 200 countries in 45 languages to a potential market of 3 billion people.
runs to 2025. Popularity also increased around the world as international players, such as Dirk Nowitzki from Germany and the Gasol brothers from Spain, joined the league. (Basketball is now the most widely played team sport in China.) NBA rosters include more about 100 international players. The NBA formed marketing alliances with global companies such as Coca-Cola and McDonald’s, and league playoffs are now televised in more than 200 countries in 45 languages to a potential market of 3 billion people.
What’s the key resource in the production of NBA games? Talented players. The following diagram (Figure 1) shows the market for NBA players, with demand and supply in 1980 as D1980 and S1980. The intersection of these two curves generated an average pay in 1980 of $170,000, or $0.17 million, for the 300 or so players then in the league. Since 1980, the talent pool expanded somewhat, so the supply curve in 2016 was more like S2016 (almost by
definition, the supply of the top few hundred players in the world is limited). But demand
exploded from D1980 to D2016. With supply relatively fixed, the greater demand boosted average
pay to $6.0 million by 2016 for the 450 or so players in the league. Such pay attracts younger players. Stars who entered the NBA right out of high school include Kobe Bryant, Kevin Garnett, and LeBron James. (After nine players entered the NBA draft right out of high school in 2005, the league, to stem the flow, required draft candidates to be at least 19 years old and out of high school at least one year. So, talented players started turning pro after their first year of college.
pay to $6.0 million by 2016 for the 450 or so players in the league. Such pay attracts younger players. Stars who entered the NBA right out of high school include Kobe Bryant, Kevin Garnett, and LeBron James. (After nine players entered the NBA draft right out of high school in 2005, the league, to stem the flow, required draft candidates to be at least 19 years old and out of high school at least one year. So, talented players started turning pro after their first year of college.
Because the supply of the world’s top few hundred basketball players is relatively fixed
by definition, the big jump in the demand for such talent caused average league pay to explode.
Average pay increased from $170,000 in 1980 to $6,000,000 in 2016. Because the number of teams in the NBA increased, the number of players in the league grew from about 300 to about 450.
Average pay increased from $170,000 in 1980 to $6,000,000 in 2016. Because the number of teams in the NBA increased, the number of players in the league grew from about 300 to about 450.
According to the above information, complete the final paper from the following
perspectives:
perspectives:
Explain in what sense can we speak of a market for professional basketball? Who are the
demanders, and who are the suppliers? What are the market equilibrium price and quantity in
1980 and 2016, respectively? Relate to the discussion of demand and supply shifters in the
textbook, explain what are some examples of how changes in supply or demand conditions have
affected this market and how each of these factors influences the average pay and the number of players per season?
affected this market and how each of these factors influences the average pay and the number of players per season?
Consider the examples of Kobe Bryant, Kevin Garnett, and LeBron James in the case,
how would you evaluate their decisions to join the basketball team instead of going to college?
How do their decisions to give up college reflect the basic economic principles?
Consider the labor market of athletes; how does their compensation reflect the issues of
earnings differentials? What other factors explain the earning differentials?
Suppose the CPI1980 is 82 and CPI2016 is 240 (base period: 1982-84=100), what are the
1980 average pay per season in 2016 dollars? How much the NBA players’ real average pay has
been inflated? Based on your calculation, has the average pay increased or decreased?
been inflated? Based on your calculation, has the average pay increased or decreased?
The above list of questions does not reflect all economic issues relevant to the market for
professional basketball. You are also encouraged to supplement your analysis of the market for
professional basketball from additional economic perspectives with additional research. Your
analysis should make economic sense.