Why are Americans addicted to baseball? An empirical analysis of fandom in Korea and the United States

Contemporary Economic Policy, Jan, 2008 by Young H. Lee, Trenton G. Smith

Men's natures are alike; it is their habits that separate them.
--Confucius

I. INTRODUCTION

Static microeconomic theory predicts that profit-maximizing monopolists will price in the elastic range of demand. The recurrent finding that many (perhaps most) professional sports teams--local monopolists all--choose ticket prices in the inelastic range has therefore been a persistent puzzle. (1)

One commonly offered explanation for this finding is that the ticket price does not capture the full cost of attending a game (Fort, 2003; Krautmann and Berri, 2007). In this view, the ticket price elasticity of attendance should be low because teams that set prices higher would suffer revenue losses from parking, concessions, and merchandise sales. In other words, the standard theoretical prediction (that monopolists set price in the elastic range) should properly be tested with respect to total cost of attendance rather than ticket price alone.

An alternative explanation for the inelastic demand phenomenon is the possibility that inelastic pricing might serve to maximize profits in a dynamic framework in which attendance meets the economic definition of a habit-forming good. Ahn and Lee (2007) showed in a simple two-period model that inelastic pricing is consistent with profit-maximizing behavior if attendance is habit forming and fans' intertemporal elasticity of substitution (IES) is small. The intuition behind this finding is as follows: just as teams would be well served to consider nonticket (but attendance dependent) revenue in setting price, they would also do well to consider the dynamic effects of ticket price on future attendance. In other words, even if setting a lower price decreases current revenue, it is possible that this loss might be more than offset by increased revenue in the future. From the perspective of the fan, if future (i.e., next season) attendance is a poor substitute for current attendance (IES is small) and the marginal utility of future attendance is an increasing function of current attendance (attendance is habit forming), then increases in current ticket prices are likely to have a negative effect on both current and future attendance. These are precisely the conditions under which a forward-looking team owner would set ticket prices below the level predicted by static microeconomic theory.

In this article, we improve upon the estimates of habit formation and IES by Ahn and Lee (2007) for Major League Baseball (MLB) using a new measure of attendance cost that includes the cost of typical expenditures on concessions, thus demonstrating that the findings of Ahn and Lee are not driven by the lack of such "total cost" data. But we also replicate the study by Ahn and Lee using comparable data from the Korean Professional Baseball League (KPBL) and find striking differences. This intriguing result underscores an unfortunate shortcoming common to most economic theories of habit formation (also known as "rational addiction"). For the most part, previous economic studies of rational addiction have focused on confirming the presence (and estimating the magnitude) of dynamic structure in consumer choice (Ahn and Lee, 2007; Becker, Grossman, and Murphy, 1994; Dynan, 2000). As a result, this literature has largely failed to offer ex ante predictions about which goods are likely to be habit forming, under what conditions they will be habit forming, or which consumers might be expected to be susceptible to such habits.

We believe that our empirical findings are suggestive of a broader theory of habit formation among sports fans. Therefore, after presenting our results, we sketch this theory, which follows the approach developed by Smith and Tasnadi (2007), who developed a theory of habit formation with respect to dietary choice. Smith and Tasnadi pursued what might be called a "naturalistic" approach to formulating a theory of consumer behavior, in that they begin by asking what optimal dietary preferences would have looked like in the preindustrial world (i.e., the environment in which humans presumably evolved). Naturalistic theories have the advantage of being subject to empirical confirmation at a number of levels: if valid, the theory should be consistent with evidence from fields as disparate as anthropology, psychology, molecular genetics, and neuroscience. (2) For this reason, our explanation for the observed differences between the United States and Korea in Section IV includes a review of scientific literatures relating to our naturalistic theory of the sports fan.

II. EMPIRICAL MODEL

We consider a rational expectations model of lifetime consumption that can be used to estimate both the IES parameter and the extent to which baseball attendance is habit forming. Our econometric model follows Dynan (2000), (3) which departs somewhat from the specifications of Becker and Murphy (1988) and Becker, Grossman, and Murphy (1994). Unlike the assumption of perfect foresight on the part of the consumer employed by these authors, Dynan's model allows for future uncertainty.