Microeconomic Analysis of the Boston Bruins

2138 words (9 pages) Essay in Economics

08/02/20 Economics Reference this

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Introduction

Since 1917, the National Hockey League has been the premier league for hockey players, coaches, and fans alike. Hundreds of thousands flock to stadiums across the United States and Canada to catch a glimpse of their favorite hockey team fight for a chance to win the Stanley Cup. With such a large and dedicated following, millions of dollars in revenue are brought in by ticket sales, advertisement, and other revenue streams. Because of this revenue, NHL teams such as the Boston Bruins follow the same economic principles as businesses because after all, they are a business. In a bid to understand these economic principles, a storied team like the Boston Bruins can be analyzed as they exemplify the nature of the NHL market. As a firm, the Bruins operate in an industry that is shaped by industry structure, the level of competition, supply and demand, and the elasticity of demand.

Industry Structure

The first critical microeconomic element of concern for Boston Bruins is the industry structure in which it operates. As a sports team, the Bruins have a unique industry structure that is generally only found in the entertainment industry. The Boston Bruins do not produce a product or service for customers, however the sellable output for the Bruins and other teams in the NHL is the game and its live action. When two teams play, the home team sells tickets for admittance. With 31 teams in the league, many games are played on a weekly basis across the NHL. The total ticket revenue in the industry is determined as the number of seats sold for each game and the number of games played in a season. “The structure of the league comes into effect when certain assumptions about the teams are made” (Sloane, 23). The first assumption is that each team, for instance, the Boston Bruins has a primary motive of profit maximization. The second assumption is that the league is designed in a way that it “seeks to enhance the material gains of the members and therefore requires that the clubs operate jointly in a bid to maximize the profitability” (Jones, 10).As there is only one premier league in the NHL, the industry operates as a large oligopoly with the 31 teams operating jointly to run the market. However, the “existence of opposing forces in the industry which shifts the clubs from one optimum to another, the joint profitability is attained in the industry”(Jones, 10). The position of the industry becomes one which seeks to ensure continued viability i.e. the continuity in the operations of the league. It means that the structure of the league is based on mutual dependence, where a single team will not survive in an environment where the rest have gone under. The action of each team within the industry is limited to the operational needs of continuity of the league, therefore one team will not attempt to run another team out of the league. With regards to the industry’s equilibrium, it can be described as one in “which the clubs are earning profits that are sufficient to keep them in the league and so preserve the viability of that organization” (Jones, 16). This institutional framework of the league and its industry structure does not change. This ensures that its profitability and existence continue for years to come.

Supply and Demand

The second element that is critical to understanding Boston Bruins’ economic theory is the demand and supply within the industry. Each team operates with an intention of maximizing their income through profitability. In order to achieve maximum profitability, the Bruins must understand supply and demand. The demand, which elicits sales, is a function of fan’s taste, ticket prices, and league competition among other factors. “The competition between the teams has an influence on the demand of the products that are sold” (Davenport, 23). The demand for the product is dictated by the level of competition and winning exhibited by the team.   For example, when the Bruins are duking it out with the Montreal Canadiens, the thrill and excitement of these games add to the number of people (demand) who want to attend the matches. As the intensity and importance of the games rise, demand for tickets also increases, which lead to higher ticket prices and sold-out matches. All factors held constant, the demand for the matches is influenced by the media coverage and the position of the teams in the league. When a game between the Boston Bruins and Tampa Bay Lightning is a top of the table clash with playoff implications at the end of the NHL season, it is expected that the stadiums will be full, and sales will be at its peak. The high demand translates to higher revenues for the teams involved and the entire league. “It works in line with the industry motive of profit-making” (Demmert, 34). On the supply side, the Bruins are influenced by the supply which is obviously a key input within economics. The team’s supply in regard to sellable product is the players. Without players, there would be no games to be played and nothing to watch on the rink. “The uncertainty over the outcome the game is heavily based on the players” (Jones, 14). The NHL enforces a maximum roster size and a salary cap to ensure that the supply of the players within the industry is regulated, so that teams like the Bruins cannot “buy” all the best players to keep them away from other competitive teams. The NHL implements such rules because when the supply of players within the market is not properly balanced, it could make the league unfair and lead to the breakdown of the entire demand for the games. The balance of supply (players) and demand (ticket sales) correlates as a direct relationship. When the Bruins sign a star free agent, the demand for Bruins tickets will rise, as more fans want to witness the new player in action. This relationship between demand and supply is key when analyzing the Bruins and the microeconomic principles that govern the Bruins as a business.  

Competition

The third concept of microeconomics that is analyzed in relation to the Boston Bruins is a competition that exists between the clubs. It is evident from the discussion of the demand and supply that competition is one of the most critical factors that define how the industry and the firms operate. “The level of competition is measured as the degree of uncertainty over the outcome of a game, so that the greater the uncertainty the larger the gate” (Jones, 13). As explained previously, the attendance at the gates will reduce when the level of competition is low and the outcome of the games is predictable. The mutual dependence within the industry might limit the level of competition, however, the teams continue to battle one another, and the outcome is positive. The Bruins are privileged to operate within an environment where increased competition means an increase in revenue.  In addition to fan revenue, increased competition can attract corporate sponsors to sponsor stadium sections, banner ads, and other advertisements to capitalize on the influx of fans brought in by increased competition. The Boston Bruins operate within an oligopolistic market where teams promote competition to ensure their survival within the market. Such competition allows the Bruins to accept joint profitability from the market with the other NHL teams without providing a single team a clear advantage to win the Stanley Cup. Competition is also present on the ice as players play to receive high-compensation contracts with their own team as well as supplementing their free agent resumes at the end of their contract period. The Bruins utilize competition and the desire to win the cup to generate excitement by trading player with other teams.  The Bruins also trade to get the best players in an attempt “to differentiate their product from other similar products” in the rink. (Suominen, 5). While trading can help bring in better talent and aid team performance, the Bruins management must also watch team morale and long-term cooperation, therefore the balance of competition must be maintained in the short and long run. All of these forms of competition play large parts in the operations of the Boston Bruins and how they use microeconomics within their organization.

Elasticity of Demand

The last element of economics that influences the Boston Bruins is the elasticity of demand. It is evident that the demand for the games is less influenced by the ticket prices that are charged by the teams and more influenced by the supply and competition. Elasticity of demand is based on the understanding that demand’s base is determined using on the income of the market population and the market size. In the NHL, teams in large, metropolitan areas like Boston are expected to have higher attendance, with many games reaching stadium capacity. Big franchises such as the Boston Bruins take advantage of “local monopolies with almost zero marginal costs of attendance” (Suominen, 5). It means that the process of maximizing profit is equated to maximizing revenues “and the results is based on setting prices of the ticket high enough to ensure that there is unitary elasticity in pricing” (Davenport 23). Studies conducted have indicated that “sporting events are priced in the inelastic range” (Davenport 18). If a case study of the Bruins were to be conducted, it would be expected that the elasticity of demand will be in line with Coates and Harrison’s findings. This study by the authors focused on the Major League Baseball attendance and used panel data collected for a period of seven years. Attendance is explained by variables such as the population of the team’s hometown and the winning percentage of the team. It was determined in the study by Coates and Harrison that the “ticket price is negatively associated” (Suominen, 5). Different measures were applied in the study such as using “gate” collection and the “seat” prices, and it was established that “regardless of the price measure applied, the pricing remained inelastic in nature” (Suominen, 6). The same results have been reported in several studies include Coates and Humphrey; Depken among others. The income of the hometown plays another critical role in terms of determining the attendance in the league. The income of the fans is considered to be influential in terms of the number of fans with the ability to afford the cost of home games for the Boston Bruins vs demand for tickets. In a highly populated area like Boston, income is less crucial than in smaller markets such as San Jose. The entertainment value is generally not associated with the price since the stadium environment is enjoyable and all the fans are watching the same game. Although demand is inelastic, ticket prices must be set at the right levels to maximize profit and sell the most tickets, which is key when running a team such as the Bruins.

Conclusion

In conclusion, it is correct to state that the Boston Bruins is a team whose operations are influenced by classic microeconomic elements. The best way to comprehend the operations of the Bruins or any NHL team is through understanding what concepts govern the economics of the industry they operate in. The Bruins are influenced by competition, supply and demand, industry structure, and the elements of elasticity of demand to set prices. With some small differences, the NHL and its teams operate in the same way that other sports leagues such as Major League Baseball, National Basketball Association, and Major League Soccer. The market for professional sports is one that is kept alive by the excitement and experience provided from watching the home team battle the opposition for a chance to bring home a championship. While sports teams like the Bruins have superstars and multi-million-dollar contracts, it is important to realize that all of the goals, baskets, and home runs that fans love to watch would not be possible without economics.

Reference Material

  • Demmert, Henry G. The economics of professional team sports. Lexington, Mass:
  • Lexington Books, 1973.
  • Davenport, David S. “Collusive Competition in Major League Baseball its Theory and
  • Institutional Development.” American Economist 13.2 (1969): 6-30.
  • Jones, John CH. “The economics of the national hockey league.” The Canadian
  • Journal of Economics/Revue canadienne d’Economique 2.1 (1969): 1-20.
  • Sloane, Peter J. “The labour market in professional football.” British Journal of
  • Industrial Relations 7.2 (1969): 181-199.
  • Suominen, Seppo. “Demand for ice hockey, the factors explaining attendance of ice
  • hockey games in Finland.” Retrieved February 3 (2009): 2012.
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