The English Premiership Football Industry:

Do Teams Price As Profit Maximisers?

by

Z0225750

BSc. Economics with Mathematics

Department of Economics & Finance

University of Durham
March 2005
 The English Premiership Football Industry:
Do Teams Price As Profit Maximisers?

Executive Summary

This dissertation explores the validity of the profit maximisation objective within the

English football industry. I compare this with the utility maximisation assumption

that has been widely adopted in the European sports context. In doing so I examine

the industrial structure, behaviour and objectives of the football team. I also consider

the revenues, costs and attendance demand facing Premiership clubs.

I find that the objectives of the club have changed since the creation of the

Premiership and there is evidence to suggest teams are perhaps more concerned with

profit than previously thought. The presence of large television contracts has been a

welcome source of funds allowing investment in infrastructure and players, which in

turn may be a reason for increased spectator demand. However wage inflation and

high transfer fees have led to unsustainable costs for some, casting doubt on profit

maximisation behaviour.

To test for profit maximisation behaviour in the pricing of football matches, I develop

an empirical test. Using a demand function from the existing literature, I derive a

revenue function upon which appropriate first and second order conditions are placed.

I find that 15 of the 19 teams considered satisfy these conditions suggesting that teams

behave as profit maximising agents with respect to ticket pricing decisions.

2
I consider the implications of these findings on policies such as league size, revenue

sharing and labour market restrictions. Further, due to the availability of individual

team performance and financial data, the Premiership can be used favourably as the

subject of economic studies at a micro level in non-sport contexts.

3
 Table of Contents
Page

Executive Summary 2
List of Tables and Figures 5

I. Introduction 6
1.1 Motivation
1.2 Outline of the Dissertation

II. Structure and Behaviour of Professional Football Clubs 8

2.1 Industrial Structure
2.2 Quantity Pre-commitment and Capacity Constraints
2.3 Some Economics of Ticket Pricing

III. Objectives of the Firm: Profit Maximisation vs. Utility Maximisation 19

3.1 Conflicting Interests
3.2 Utility Maximisation
3.3 Profit Maximisation

IV. Demand, Revenues and Costs 31

4.1 Revenues and Costs
4.2 Effects on Demand for Football
4.3 Estimated Demand Functions

V. Empirical Test for Profit Maximisation 42

5.1 The Data and Model
5.2 Analysis of Results
5.3 Policy Implications

VI. Conclusion 54
6.1 Concluding Remarks
6.2 Ideas for Further Research

Bibliography 56

Appendices 1-6 60

4
 Page
List of Tables

2.1 Utilisation of Club Stadia 2002/2003 12

3.1 Correlation Coefficients for Profit, Attendance

and League Position 24

4.1 Percentage Breakdown of Revenue 2002/2003 32

4.2 Costs and Wage/Revenue Ratio 2002/2003 33

5.1 Attendance, Turnover, Gate Receipts and

Calculated Ticket Price 2002/2003 44

5.2 First and Second Order Derivatives of the Revenue Function

for the 20 Premiership Teams in 2002/2003 48

5.3 Ownership and Objectives 49

List of Figures

2.1 Change in Average Admission Price 1926-1999 18

2.2 Change in League Attendance 1926-1999 18

3.1 Average Price versus Average Attendance

for Premiership Clubs 2002/03 26

4.1 Payoff Matrix for Expenditure on Players 34

5
 I. Introduction

1.1 Motivation

Early literature on the economics of professional team sports focused on

American sports. One of the first studies of the English football industry was by

Sloane (1971) who looked at the club as a utility maximiser. Since then much of the

literature has focused on the objectives and demand for football (or soccer). It has

been generally considered that, whilst in the US teams are profit maximisers, this is a

less valid assumption for teams in Europe (e.g. see Fort and Quirk (1995) and Sloane

(1971)). However there has been little empirical work on testing a profit maximisation

hypothesis in the English football industry.

The availability of firm level data makes this an attractive topic for economists

wanting to empirically test hypotheses at a micro level. Economics of sports also

provides an opportunity to study a variety of microeconomic behaviour in a real life

setting, such as collusion, revenue sharing, price setting behaviour and maximisation

hypotheses, which may be absent elsewhere.

1.2 Outline of the Dissertation

The focus of this dissertation is The English Premiership1. Its formation was partly an

attempt to restore the reputation of English football and counteract declining

attendances. The commercial benefits largely arising from broadcasting rights were

also an important factor2.

1
Appendix 1 provides details of the organisational structure of the Premiership.
2
For example in 2003/2004 Premier League television and media payments included a basic award of
£10m per club, plus £600,000 per live game and a merit award of £500,000 per league position. In

6
The dissertation proceeds in the following way. Chapter 2 looks at the industry

within which football teams operate, considering the economic structure of the

football club, and its implications on the behaviour of teams. Chapter 3 focuses on

the objectives of the football club as a firm, providing discussion and some evidence

to support both the utility and profit maximisation objectives. Chapter 4 analyses

revenues and the recently spiralling costs in the Premiership before proceeding to look

at the literature focusing on the various aspects of demand for football including

effects on and estimation of demand functions. A demand function, chosen from this

literature, is then used as the basis of a statistical test for profit maximisation, as

outlined in Chapter 5. The results are then presented, explained and critically

assessed. Implications of my findings on policy are also developed here. Finally

Chapter 6 concludes and suggests ideas for further research.

contrast, total revenue from television, media and sponsorship in the division below is less than £1m
per club. (source: Sunderland PLC annual report 2003)

7
II. Structure and Behaviour of Professional Football Clubs

Neale (1964) refers to "The Peculiar Economics of Professional Sports…" which

influences the behaviour of the football clubs. The first peculiarity is that sporting

competition not business competition generates interest and thus gate revenues. The

more evenly matched the teams the greater the uncertainty of outcome and the greater

the spectator interest will be. Teams therefore have an interest in the success of their

competitors, so as to generate maximum interest. Whereas normally a firm would

desire a position of monopoly, in sport this is not so, as if there is only one team then

there is no game. However it is feasible for one owner to own all teams in the league

so long as credible sporting competition exists. The second peculiarity is that the

product (the match) is a result of a joint effort of both teams. In this sense teams are

interdependent.

A further unusual characteristic is that, due to loyalty of fans, even if clubs do not

meet the needs of the consumer they do not switch to competitors - instead they

simply don't attend.

2.1 Industrial Structure

Neale concludes that the firm in this context is not actually the team but instead it is

the league within which teams operate and hence the firm is a natural monopoly. In

this context it is not uncommon for a manager from one plant to 'transfer' to another

plant - this is analogous to the transfer of players between clubs. If this were the case

then 'duplication' would be inefficient and only one league should exist. In

professional football this is not the case.

8
Sloane (1971) however considers the team to be the firm and the league to be a

regulator. It is this view - the club as the firm - that I adopt in this dissertation. This

seems a more realistic assumption since a firm can be defined as a "decision making

unit whose major objective is profit" (Neale (1964) pp.4). It is the football club that

makes important decisions regarding the inputs (players) and commercial activities.

The applicability of the profit objective is discussed in Chapter 3.

A club can be said to have a local monopoly if it is the only club in a given area, and a

spatial duopoly or oligopoly if there exists more than one club. However sporting

competition need not be in the same geographical area (particularly now with the

widespread use of the car) nor the same industry. Therefore even if a club is the sole

club in a city, for example Leeds United F.C., it is not necessarily the case that it

possesses a local monopoly. It may face competition from nearby clubs, such as

Bradford City, or even different sports, such as Leeds Rhinos Rugby Club. The

existence of population 'caption areas' seems less important today than 30 years ago.

It should be noted however that most alternative sporting events try to schedule so as

to avoid clashing of fixtures, and thus reducing the competition from other sports.

In respect to broadcasting rights Premiership clubs can be viewed as a cartel. This is

because the clubs jointly agree to sell broadcasting rights to its matches - presumably

to jointly maximise revenue/profit (Forrest et al. (2003) provide further discussion).

A cartel is an organisation or collection of firms that acts in the interest of its

members. The Premier League itself also seems to be cartel-like. The decisions it

takes and the rules it imposes have an impact on the structure and therefore behaviour

9
of firms. For example in restricting the number of clubs in the league to 20 it is

limiting the competition each club faces. The Premier League (and the FA3) also

imposes rules on entry and exit, in the form of relegation to and promotion from The

Championship. In doing so the league is assuming that this number of firms and the

level of barriers to entry/exit are optimal for its members with respect to the

objectives they may have.

Acknowledging that the league can be seen as a cartel and clubs do have a degree of

monopoly power, it seems the structure of the industry itself is closest to that of an

oligopoly. A defining characteristic of an oligopoly is that firms are interdependent,

which we have seen is the case here. The league is also dominated by a small number

of larger clubs and many smaller ones. This is reflected by a four-firm concentration

ratio of 39.9% in terms of share of revenue. However the Herfindahl-Hirschman

Index (HHI) which can range from 0 to 10,000 gives a result of just 664.4. This

suggests a fairly competitive market as concentration is considered low4. The

implication of this would be to assume a limited price setting ability. However this is

not the case due to the (almost) unique characteristics of the football industry. Indeed

one non-oligopolistic feature of the Premiership football industry is the ability of

clubs to set price. To this end clubs do have a degree of monopoly power due to a

'loyalty factor', discussed in Chapter 3. Forrest et al. (2002 pp.1) suggest each club

will face a downward sloping demand curve as there are, in the eyes of loyal

supporters, no near-perfect substitutes.

3
For details see Appendix 1.
4
For example the US Department of Justice considers a HHI value of between 1000 and 1800 as
moderately concentrated.

10
2.2 Quantity Pre-commitment and Capacity Constraints

The Premiership Football industry is a thus complicated one. Clubs are regulated by

the FA and operate within the Premiership, but retain power over decisions regarding

price and quantity. Output is restricted to the number of league games played each

season as specified by the FA.

Other than price - which the club sets at the beginning of each season - the decision

variable of importance is the size of the club's stadium. Since the Taylor (1990)

report clubs have been bound by strict rules regarding the safety of stadiums.

Premiership teams are (now) required to have all-seated stadiums, which has reduced

the capacity of each club's stadium. Consequently in recent years, as the demand for

football has increased many clubs have been bound by capacity constraints. Table 2.1

shows the average attendance of each club and their ground capacities, the fourth

column shows the utilisation of each club. Of the 19 teams 12 have a 95% or more

utilisation of their grounds. For clubs such as Arsenal, Manchester United and

Newcastle Untied sell-outs are a frequent occurrence. I have defined, rather

arbitrarily, a sell-out as a match in which recorded attendance was within 1000 of the

ground capacity. In doing this I hope to reflect the possibility of, for example, season

ticket holders not attending a match but still rendering their seat unavailable. The

table suggests that for some Premiership clubs (in 2002/2003 at least) capacity

constraints are significant.

11
Table 2.1 Utilisation of Club Stadia 2002/2003

Club Total Capacity (ground Utilisation Number of

League size multiplied by (%) Sell-outs
Attendance 19)
Arsenal 722,779 731,500 98.8 19
Aston Villa 664,525 809,096 82.1 3
Birmingham 549,252 570,171 96.3 13
City
Blackburn 498,294 595,973 83.6 1
Rovers
Bolton 475,266 529,701 89.7 6
Wanderers
Charlton 498,864 510,625 97.7 17
Athletic
Chelsea 755,896 805,980 93.8 2
Everton 731,329 764,940 95.6 10
Fulham 317,433 363,812 87.3 0
Leeds 743,280 763,876 97.3 13
Liverpool 821,617 861,878 95.3 0
Manchester 656,735 665,000 98.8 16
City
Manchester 1,284,476 1,295,306 99.2 18
United
Middlesbrough 589,475 665,931 88.5 5
Newcastle 986,537 992,142 99.4 18
United
Southampton 582,920 618,469 94.2 9
Sunderland 754,262 917,700 82.2 1
Tottenham 682,043 688,484 99.1 17
Hotspur
West Bromwich 507,794 529,663 95.9 13
Albion
West Ham 653,714 674,500 96.9 14
United
(Source: www.statmail.co.uk)

Continuing with the assumption of the club as a spatial duopoly or oligopoly, one can

analyse a club's behaviour using the outcome of a duopoly game. Edgeworth first

looked at price duopoly with capacity constraints in 1897 in response to models by

Cournot and Bertrand. He concluded that unlike Cournot's and Bertrand's outcomes

12
of models without constraints, the outcome of his constrained game was

indeterminate5.

Cournot studied a duopoly situation where two firms produced a homogenous product

at constant marginal cost and chose quantity corresponding to a 'best response'. Nash

equilibrium is achieved where each firm's chosen output is the best response to the

others'. Bertrand on the other hand took price to be the decision variable not quantity.

Consequently Bertrand's outcome was the competitive one - where price of firm i was

equal to price of firm j which were both equal to marginal cost. However if firms do

not have equal costs or if the goods (football matches) are not perfect substitutes, as is

the case in Premiership football, then the competitive outcome no longer holds.

In other models of duopoly/oligopoly the Bertrand-like price competition is the 2nd

stage of a two stage game, whilst at the first stage capacity levels are chosen. Kreps

and Scheinken (1983) show that under certain assumptions such a game results in a

perfect equilibrium that coincides with the Cournot outcome. Szymanski and Smith

(1997) argue competition over ticket prices is unlikely to be a common feature,

instead clubs are more likely to compete on the market for playing talents where they

buy and sell players to achieve league success and thus higher demand, rather than

through lower prices. In view of this, it is of the author's belief that clubs part-take in

a two stage game comparable to the one described by Krep's and Scheinken (1983).

In it's simplest form at the first stage clubs decide on the capacities of their stadium

and at the second stage (and every season after) decide upon a ticket price level to

maximise revenues subject to this capacity constraint. Since the Taylor report there

5
See Levitan and Shubik (1972)

13
has been a total of over £1.2 billion invested in facilities by Premiership Clubs6. More

specifically ground capacities have been increased by many as well as new stadiums

being built7. This points to the fact that ground capacities are an important decision

variable for clubs.

Bertrand-like price competition is however unlikely to be the case at the second

stage. Moreover clubs have a degree of monopoly power and can set price according

to their objectives. If a club's objective is to maximise profit it should be the case that

at equilibrium the marginal cost of supplying a game is equal to the marginal revenue.

There are some other differences to the Kreps and Scheinken model. Firstly there are

more than two firms in the Premiership, and the product they produce is not

homogenous. Secondly marginal costs may not be identical across all clubs. Thirdly,

as they point out, in reality many stages exist and this could greatly affect the

outcome8.

The purpose of this subsection was to provide an insight into the economic behaviour

of the football club. Although it is not the purpose of this dissertation to determine

whether Cournot equilibrium exists in football, it is none-the-less important to

consider the economic logic behind a club's behaviour. In assessing whether a firm is

a profit maximiser or not, one can look at such behaviour. This dissertation's primary

aim is to determine profit maximising behaviour through the pricing of tickets. Of

6
Source: Deloitte News Release dated 4th June 2004 'Football Finance: improving finances at
Premiership clubs
7
Arsenal F.C., for example, has decided to build a new much larger stadium costing in the region of
£400 million. Clearly a decision of this magnitude is not taken lightly, but seen as a necessary
investment to secure the club's long term future.
8
Davidson and Deneckere (1986) also show that the Kreps and Scheinken outcome depends on the
way in which demand is rationed when excess demand exists.

14
course there is more than just the pricing of tickets that determines whether a football

club is a profit maximiser, some of which is considered in later chapters.

2.3 Some Economics of Ticket Pricing

As we have seen clubs have price setting abilities and therefore it is interesting to note

the ways in which ticket prices can be set and the motives behind such pricing.

Although clubs are seen to have price inelastic demand (especially in the cases where

capacity utilisation is high) it is rare to see extortionate prices. None-the-less clubs

partake in a variety of practices towards ticket pricing, presumably aimed at

extracting increased consumer surplus.

It can be seen that clubs part-take, to some degree, in price discrimination. No seat is

the same and so prices are dependent on where they are situated in the stadium. For

example front row seats often cost more than seats at the back (known as scaling the

house). Courty (2000 pp.176-177) notes that some firms offer a menu of prices and

the consumer chooses their preferred seat from this. Indeed Premiership clubs do

offer such menus set at the start of a season with prices varying between stands.

Different users are also charged different prices - for example tickets are frequently

categorised as adults, children, OAPs or family.

DeSerpa (1994) sets out to explain the apparent under-pricing of sports events without

the loss of profit maximising hypothesis. He argues that organisers face a complex

economic problem when they expect a high sell-out rate with unexplained variations,

and that the simple solution is to promote season-ticket sales. The price of the season

ticket incorporates the priority rights that come with it. Like many DeSerpa points to

15
the fact that in a dynamic game (more than one season) owners have to build up

loyalty and avoid exploiting fans. In the US if games are not sold out 72 hours before

kick off then they cannot be shown on television. This can be used to explain why

some events seem under-priced to ensure games are sold out and television revenue

received. This however is not applicable to the Premiership as broadcasting rights are

negotiated before the season starts with a pre-announced number of live games. In

this view television in English sports leagues can be seen as a substitute whereas in

the US it's more of a complement good.

Figure 2.1 shows how ticket prices have increased three fold in real terms over the

period 1980 to 1999 for English league football. The price of attending football

matches has increased by almost eight times in real terms since 1926. Figure 2.2

shows the trend in attendance over the same period. There is an increase in both

attendance and admission price since 1986. This suggests that part of the steep

increases in admission price in recent years reflect the clubs' capacity constraints. A

simple supply and demand model tells us price increases to ration demand. Indeed

capacity utilisation in the Premiership has increased from 81.9% in 1994 to 91.1% in

1999 to 93.7% in 20039. Clubs face a capacity decision as discussed in the previous

subsection. Since tickets are perishable goods it is likely that this capacity will be set

so to avoid high holding costs - that is, to avoid excess capacity (spare seats/tickets).

Consequently some clubs have experienced a situation of excess demand due to them

setting capacities cautiously low, and are now moving to bigger grounds.

9
Deloitte News Release dated 4th June 2004 'Football Finance: improving finances at Premiership
clubs'

16
Hence pricing tickets is not a straightforward static decision where one might expect

to charge as to maximise the difference between revenue and costs if profit was one's

motive. Indeed many factors and constraints are considered in this dynamic game and

possibly explain what is seen in reality.

17
Source of data: Dobson and Goddard (2001 pp.57&74)

18
III. Objectives of the Firm: Profit Maximisation vs. Utility Maximisation

3.1 Conflicting Views

It is clear that football clubs were not formed as profit maximising businesses and

were not run like them either. Many clubs were founded from local companies or

even churches simply to enable the working class man to continue his hobby. The FA

even imposed restrictions on dividends up until the 1990's so that making money out

of football was not easy. Many Football clubs however became public limited

companies during the nineties10 and so conventional business objectives have become

more applicable than was perhaps seen just 20 years ago (see Szymanski and Hall

(2003) for discussion). These clubs are more accountable and are thus more likely to

adhere to profit maximisation objectives as their main aim should be investor return.

But the fad of listing companies seems to be at an end with many now returning to

private ownership. Investors are less attracted to clubs as risks are high - the financial

impact of relegation is huge and each year three out of twenty clubs are.

There are many different stakeholders within clubs and it is important to distinguish

between their differing interests. Stakeholders of a football club may include owners,

shareholders, supporters, managers, the local community and even broadcasters.

Many owners' primary objective would be that of profit maximisation11, whilst the

supporters want on-field success (winning trophies). Shareholders desire high

dividends and increasing share prices, whilst managers want money to build a

successful team. Clearly conflicts of interest may arise. In order to achieve success

on the pitch, satisfying supporters and managers interests, a club will probably need to
10
For examples see table 5.3
11
However many disagree and believe businessmen who have made their riches in other industries
acquire control of a club for 'the love of the game or club', and the utility they gain from it.

19
purchase quality players. This cost of buying players however may not be a profitable

investment - resulting in either unprofitable purchases or an unsuccessful team. When

looking broadly at the objectives of a club it is important to remember that these

differences exist.

Another important consideration is emphasised by Cairns et al (1986), who observe

that it is hard to distinguish between profit maximisation and utility maximisation

behaviour. They point to seven commonly used criteria that may not be as clear cut

as first thought. For example utility maximisers are considered to maximise playing

success but profit maximisers may also - if returns to winning are greater than

competitive equality. Utility maximisers may similarly maximise short run profit in

order to achieve long run playing success. Both utility and profit maximisers may

wish to limit the strength of their team to ensure a stable league. Although

performance inequality tends to be greater under utility maximisation, performance

also depends on a number of non-behavioural factors. Average league size is

assumed smaller under profit maximisation but utility maximisers may wish to restrict

size so not to reduce the probability of winning. The point is that there is not

necessarily one criterion for either of the two objectives. Profit maximising and

utility maximising behaviour may coincide (they are not mutually exclusive) and it is

not necessarily the case that a profit seeking league is inconsistent with utility

maximising clubs. Or indeed both profit maximising and utility maximising teams

may exist in the same league. So whilst one ideally wishes to categorise clubs as one

or the other, or wish to carry out a definitive test - it may not be that straightforward.

Never the less in this chapter I shall attempt to provide evidence for and against both

objectives and draw conclusions from this.

20
Sloane (1971) looked at four possible objectives that clubs may have. These were

profit maximisation, security, sales maximisation and utility maximisation. He

rejected the idea of profit maximising (or loss minimising) behaviour because of the

inability to explain why loss-making clubs did not close in the long run, which loss

minimising behaviour would imply. Security was seen as an objective of smaller

clubs that made losses, for example by the sale of star players to ensure survival for

subsequent years. Whilst Baumol (1958) believed that once a minimum profit

threshold had been reached, (large American) firms attempted to further maximise

dollar sales subject to a minimum profit constraint, Sloane rejected the sales

maximisation objective on the grounds that clubs charge the same price regardless of

the match. Some matches arouse more interest than others do and such games could

be sold for more than double the price. Sloane does note though that clubs may well

fear the 'loss of goodwill' factor, and therefore clubs could be aiming to maximise

revenue in the long run. Indeed Kahneman et al (1986) explore fairness as a

constraint on profit maximisation. That is, firms are constrained not just by legal and

budgetary constraints, but by the consumers perceived fairness of prices charged. An

unfair price is one seen to be not justified by the costs of a firm. Hence although a

certain football match (say a championship deciding match) may stimulate twice as

much demand for tickets, it would be seen as exploitation if clubs were to raise ticket

prices for that game only. Consequently clubs may face disgruntlement amongst its

fans that could adversely affect future demand/sales. It should be noted that although,

for example, in the hospitality industry consumers may seek alternative suppliers this

is less likely amongst football fans that display a loyalty factor12. None-the-less

12
A supporter of a club tends to support that club all their lives. This loyalty effect is incorporated into
many of the estimated demand functions, for example see Dobson and Goddard (2001).

21
consumers (football fans) may not attend future matches and instead watch matches

on television or not at all. Consequently firms may indeed charge below the short

run profit maximising price to ensure long term sales.

Zimbalist (2003) provides an alternative view suggesting that, as ownership has

elements of a consumption good, owners wish to maximise their total return

(consumption plus investment).

3.2 Utility Maximisation

Sloane's preferred view was that the club is a utility maximiser. He claimed owners

will maximise utility provided a minimum profit or maximum loss is realised. In

defining utility he presents a Williamson utility function dependent upon playing

success, average attendance, the health of the league, and recorded profit minus

minimum after tax profit minus taxes. Profit maximisation implies maximising the

difference between revenue and costs and so a club could choose to minimise its costs

by assembling a team of lower quality (this is what Rotternberg (1956) terms "running

behind"). In utility maximisation teams would never 'run behind'. Whether this is the

case is hard to prove but it seems more likely that football clubs would not

intentionally build bad quality teams for fear of uproar from its fans.

Utility maximisers will not sell players just to increase their profits since playing

success is an important consideration. However (good) players frequently move

between clubs due to chairmen who can't resist multi-million pound offers. Vamplew

(1982) suggests profit maximisers will be more willing to distribute playing talent as

this will lead to an equalising of sporting competition and so increasing interest and

22
attendances. He also raises an interesting point in that each club has a duty to try to

win every game (authorities and fans will not allow anything else) which could

undermine any profit objectives of clubs by reducing competitive balance.

Further support for utility maximising behaviour (and against profit maximisation) is

why clubs that persistently make losses remain in the market. It is hard to explain this

under profit maximisation as economic theory tells us rational firms would shut down.

However where continual losses have occurred there has been restructuring within

clubs with some being put into administration and shares suspended. The utility

maximising objective is therefore an appealing one that seems to be consistent with

some of what is seen. It also helps explain some otherwise puzzling behaviour by

owners13. Goddard and Sloane (2004) suggest a number of other observations that

are inconsistent with profit maximisation. These include having too large a squad and

having a waiting list for season tickets. The first and certainly the second can be seen

in some Premiership clubs thus providing support for the utility maximisation

assumption. They also argue that building a stadium larger than is needed so that the

marginal revenue product of capital is greater than its cost, is evidence against profit

maximisation. The capacity utilisation data (table 2.1) therefore suggest some clubs

may have built too large a stadium but others have been seen to increase their

capacities, suggesting otherwise.

Finally, the model by Sloane (1971) suggests that if playing success, attendance and

profit are highly correlated, profit maximisation and utility maximisation models

would produce similar results. Table 3.1 shows the correlation coefficient for

13
For example Russian oligarch Roman Abrahamovic, owner of Chelsea F.C, spent over £100m on
player purchases in 2003/2004 after acquiring the club and its debts.

23
attendance and league position, attendance and profit, and profit and league position

for data covering the period 1998-2003 for 20 Premiership clubs. We can see that 13

teams have a positive coefficient for attendance with position, with 5 considered

strong. However only 5 teams show correlation between all three variables, and 4 of

those lack sufficient data on profits. The results are therefore inconclusive.

Table 3.1 Correlation Coefficients for Profit, Attendance and League Position (as a proxy
for success)
Club Correlation Correlation of profit Correlation of league
coefficient of profit with league position position with
with attendance attendance
Arsenal -0.8210665 -0.82519 0.396316
Aston Villa 0.46589218 0.684649 -0.22941
Birmingham City 0.68548491 0.817662 0.327456
Blackburn Rovers* -1 -1 0.600134
Bolton Wanderers* -1 -1 0.647608
Charlton Athletic* 1 1 -0.17146
Chelsea* -1 -1 -0.22104
Everton† -0.9657072 -0.96978 0.988924
Fulham* -1 -1 0.98397
Leeds United* 1 1 -0.21218
Liverpool* 1 1 0.266918
Manchester City* -1 -1 0.761306
Manchester United 0.34645577 0.44536 -0.40178
Middlesbrough* 1 1 0.803221
Newcastle United* 1 1 0.677842
Southampton* -1 -1 0.484653
Sunderland* 1 1 0.3493
Tottenham Hotspur -0.8890089 0.632412 -0.53402
West Bromwich Albion† -0.9408179 -0.51304 0.835988
West Ham United* -1 1 -0.58129
*only includes data on profits for 2002/2003 and 2001/2002
†
only includes data on profits for 2000/2001, 2001/2002 and 2002/2003

It is interesting however to note that for Arsenal, Blackburn, Bolton, Everton,

Manchester City, Southampton and West Brom the coefficients could suggest one of

two things. Either they have spent money to increase the quality of their team and

24
thus gained a higher position and attracted more attendance but sacrificed profits in

doing so. Or they have not spent on their team, gained a lower league position and

attendance has fallen but profits have increased. The first scenario would be more

akin to utility maximising behaviour whereas the second to profit maximising

behaviour. Looking at the data more carefully (see Appendix 2) it would appear

Arsenal, Blackburn, Everton, Manchester City, Southampton and West Brom fall into

the first category and only Bolton into the second.

3.3 Profit Maximisation

Noll (1974) rejects utility maximisation in his study of major league sports on the

basis that one would expect to see admission price fall if attendances were higher as

the utility maximiser only seeks to cover operational costs. Figure 3.1 shows that this

is not the case for Premiership teams, instead there is some evidence to suggest that

clubs with higher attendances are willing to take advantage of any excess demand.

Since Sloane's original paper the football industry has changed dramatically and so

therefore has its objectives. Profit maximisation is therefore more reasonable today

than when football was merely a leisure activity. However one recurrent argument

against the profit maximisation objective for football teams concerns the demand for

football and that many studies have found a price elasticity of demand that is inelastic.

25
For example Bird (1982 pp.644) finds a value of -0.22, Szymanski and Smith (1997)

-0.34 and Dobson and Goddard (2001 pp.353) -0.114. This has raised the question as

to why, if clubs are profit maximisers, do they not raise prices in the face of inelastic

demand. One explanation, already mentioned, is the loss of goodwill factor. Another

is the desire to sell out, which in turn may increase spending on merchandise or

increase the chance of being televised. Doubt over the validity of this argument is

raised by the fact that Figure 2.1 showed how real prices have more than tripled since

1980 alone.

There is also doubt over the validity of the elasticity estimations. Forrest et al. (2002)

note that high inelastic demand could just reflect that clubs price too low relative to

their objectives, but they believe that previous studies have all underestimated price

elasticities of demand. They argue a reasonable prior would be for demand to be unit

elastic and if this corresponds to a price that exhausts capacity then demand could be

elastic. Most previous studies of demand use time-series or cross-sectional data and

26
except Bird (1982) none include transportation costs. Forrest et al. (2002) provide a

number of reasons as to why these are inappropriate and find that it is transportation

costs that bear greater significance on demand elasticity than the ticket price. Using a

'travel-cost approach' they find for eight clubs demand is elastic - if nothing else this

raises doubt on previous studies. Similarly Simmons (1996) finds varying elasticities

and for two clubs price elastic demand. Consequently demand may not be as inelastic

as previously thought. Although Forrest et al. (2002 pp.352) find their results of

pricing at a point a little less elastic than minus one to be inconsistent with ticket

revenue maximisation and profit maximisation, they maintain that profit maximisation

is more plausible here than if they had found extremely inelastic demand. In

conclusion they believe football teams' pricing is more consistent with profit

maximisation than previously thought. Such findings are based on the result that if

marginal cost is greater than zero profit maximisers should set prices such that the

absolute price elasticity of demand exceeds unity (Cairns (1986 pp.9-10)). If firms

are revenue maximisers marginal revenue should equal zero; in other words elasticity

of demand should equal unity. If marginal variable costs are zero then unity and

elastic are the respective conditions. The results of previous studies finding demand

for football to be price inelastic therefore fail to support either objective. Noll (1974)

and Walker (1986) suggest attendance maximisation could be the club's objective if

clubs operate on the inelastic part of the demand curve. Kesenne (2002) however

criticises studies based on elasticities since most fail to consider capacity constraints,

large non-gate revenues and other costs of attending matches.

Rottenberg (1956) argues if teams act like rational maximisers then playing talent will

be more evenly spread throughout teams. This is because as a team employs more

27
star players eventually diseconomies of scale set in (only 11 players can play) and

attendances will fall as the quality gap between those with star players and those

without increases. This competitive advantage leads to predictability in outcomes and

thus less interest. One could use this hypothesis to argue for profit maximisation by

simply observing the distribution of star players among Premiership teams. Without

providing proof it is the author's belief that there tends to be an uneven spread of

talent among clubs. Whilst most clubs have at least one 'star player' the teams at the

top of the league tend to have many more. One could explain this in two ways: either

the teams at the top of the league win more money (for a higher placed finish) and so

can afford and attract the star players, or the star players have become 'stars' because

they have finished at the top of the league.

Rottenberg therefore says profit maximising teams prefer to win by a close margin

than by a wide margin, as this increases interest. Again one can simply look at the

final league table14 of each season to see the distribution of results. One would expect

that if teams were evenly matched the range and the standard deviation would be

'small'. For example in the 2002/2003 season the range (highest place team minus

lowest placed team) of points is 64 and the mean is 52.5 - simple inspection tells us

the highest and lowest placed teams are unevenly matched. The unbiased sample

variance is 234.789, with standard deviation 15.3. This tends to suggest that there is

a relatively large dispersion of points around its mean and hence points are not evenly

distributed. However although the points are unevenly distributed it may still be the

case that teams prefer to win by close margins, for example the top team may win it's

games by only one goal (a close margin). This brief insight could be extended for

many seasons and for variables other than points, such as goals scored/conceded.
14
See Appendix 1

28
With respect to sporting competition, clubs compete in the player's market and hence

we should see purchases up to the point where the marginal benefit generated by an

extra unit of talent equals the marginal cost of employing that extra unit. Herein lies

another possibility for empirical investigation.

Further evidence that may suggest English clubs are more profit motivated than

previously believed lies in a study by Szymanski and Hall (2003), who look at the

performance of clubs before and after becoming Public Limited Companies. They

find, on the assumption that a shift toward profit maximising behaviour should occur

after flotation, that clubs objectives have not changed. This could suggest clubs were

always profit maximisers or did not become profit maximisers after. They believe

though that clubs have been "…more oriented toward profit objectives that is

normally allowed" (Szymanski and Hall (2003) abstract).

This chapter has presented some circumstantial evidence for the differing views.

Whilst utility maximisation seems to explain some behaviour better, profit

maximisation may still occur. Interestingly Kesenne (2002) shows that the optimal

pricing strategy for a profit maximising team and a win maximising team (a special

case of Sloane's utility maximiser) are the same in his model. He therefore argues it is

not possible for a model based on ticket prices to distinguish between the two

objectives. It is not clear whether this is applicable to models other than the one he

presents. As Cairns et al. (1986) state if one were to adopt the utility maximisation

assumption whereby both profit and non-profit objectives are pursued, then almost

any sort of behaviour can be viewed in this way. This reduces the usefulness of any

such model in terms of policy and prediction.

29
Theoretically there are a number of tests one could carry out to determine either

objective. For example, Goddard and Sloane (2004) observe that having a wage that

is higher than the player's marginal revenue product, charging a price less than the

marginal cost of providing the product and setting prices in the inelastic segment of

the demand curve are all inconsistent with profit maximisation.

IV. Demand, Revenues and Costs

30
Before moving onto a survey of the demand literature relevant to my study I shall

consider the clubs revenues and costs, which in turn can affect demand and vice versa.

For example if costs to a club increase they may wish to increase price which in turn

could increase or decrease revenue depending on whether demand is inelastic or

elastic. Alternatively demand may increase which could increase revenues but

perhaps also costs if a new stadium were required to satisfy this demand.

4.1 Revenue and Costs

The main sources of revenue for Premiership clubs are gate receipts, broadcasting,

sponsorship and commercial activities. The proportion of total revenue taken by these

has changed since the introduction of Sky television. For almost all clubs television

revenue takes the largest share of total revenue replacing traditional dependence upon

gate receipts. Table 4.1 shows the breakdown of Premiership clubs' revenue as a

percentage of each club's total revenue. We can see for all clubs broadcasting

accounts for the largest percentage of total revenue (except for Manchester United

who have the largest capacity and attendance figures), whilst for some lower quality

teams it is in excess of 50% of total revenue. This dependence on broadcasting fees

and willingness to spend this money on increased wages and transfer fees has led to

the financial 'crisis' some clubs have experienced. If relegated from the Premiership,

clubs find themselves in a situation of unsustainable wage bills and amortisation of

transfers in the absence of sufficient television revenue.

Table 4.1 Percentage Breakdown of Revenue 2002/2003

Club Total Broadcasting Matchday Retail Commercial Other

Revenue (£) (%) (%) (%) (%) (%)
Arsenal 117,831 44.0 23.7 7.2 13.2 11.9

31
Aston Villa 45,447 37.4 21.4 8.2 13.5 19.5
Birmingham City 36,480 11.6 70.8† - 17.6 -
Blackburn Rovers 45,438 53.0 18.7 - 28.3 -
Bolton Wanderers 30,791 59.7 18.7 3.7 5.4 12.5
Charlton Athletic 35,141 57.9 27.5 3.4 8.4 2.8
Chelsea 75,136 32.3 32.7 - 35.0 -
Everton 46,781 53.8 31.4 7.1 7.7 -
Fulham 33,640 65.0 21.3 - 13.6 -
Leeds 64,005 34.2 19.2 11.6 27.2 7.8
Liverpool 102,504 28.9* 20.8 11.1 15.3 23.9
Manchester City 49,028 48.9 19.4 - 31.4 0.3
Manchester United 173,000 32 41 - 27 -
Middlesbrough 40,229 N/A N/A N/A N/A N/A
Newcastle United 96,449 43.2 33.9 8.3 9.9 4.6
Southampton 48,875 46.7 37.5 - 15.8 -
Sunderland 42,454 45.2 28.6 6.5 13.4 6.4
Tottenham Hotspur 65,033 36.6 38.3 8.1 10.7 6.2
West Bromwich 28,445 62.5 18.6 6.6 11.1 1.2
Albion
West Ham United 51,712 40.8 28.3 17.5 6.7 6.6
*League only, N/A = not available.
†
Includes FA and football league distributions.
Source: Individual Club Accounts 2002/2003

The main costs facing clubs are largely fixed. We can consider both player transfer

payments and players wages as fixed costs as these do not vary on a game to game

basis or with attendance. Building of stadia is also a fixed and long-term cost, which

does not vary with output. Amortisation of transfer fees is a large part of many clubs

costs in their annual accounts but for the purposes of this study are largely irrelevant.

Marginal variable costs can be interpreted in two ways in the context of football. If

the analysis is season to season then the variable costs are those that vary over the

season. However if a match by match analysis is employed the marginal costs are

those that change per match. The former therefore can be seen as (at least) 19 times

the latter (since a season consists of 19 home games) and hence marginal costs will be

more significant in a season analysis. Variable costs, such as catering staff and

stewards at each match, are small relative to total costs and in general do not vary

32
with attendance per game. The inclusion of costs in the empirical test of Chapter 5 is

therefore omitted, hence revenue maximisation and profit maximisation coincide (see

footnote 21).

Table 4.2 shows the extent to which many clubs over-spend on player's wages

presumably in an attempt to maximise on field success. Not one club has a

wage/turnover ratio less than 40% with almost half having ratios of over 70%.

Table 4.2 Costs and Wage/Revenue Ratio 2002/2003

Club Operating Expenses Staff Costs Wages as percentage of

(£000's) (£000's) revenue (%)
Arsenal 113,786 60,569 51.4
Aston Villa 58,997 32,310 71.1
Birmingham City 25,750 19,737 54.1
Blackburn Rovers N/A 35,512 78.2
Bolton Wanderers N/A 24,421 79.3
Charlton Athletic 36,041 23,576 67.1
Chelsea 65,557 45,207 60.2
Everton 46,776 29,735 63.6
Fulham 46,749 36,058 95.7
Leeds N/A 56,600 88.4
Liverpool N/A 54,000 52.7
Manchester City 60,293 35,371 72.1
Manchester United 139,170 79,517 46.0
Middlesbrough N/A 28,804 71.6
Newcastle United 84,828 45,195 46.9
Southampton N/A 26,666 54.6
Sunderland 65,995 34,011 80.1
Tottenham Hotspur N/A 38,024 58.5
West Bromwich Albion 18,576 11,452 40.3
West Ham United N/A 33,342 64.5
N/A = not available.

33
Although the wage/turnover ratio for most clubs seems alarmingly high, we must

remember that football is a labour intensive industry, and there are signs that clubs are

finally getting costs under control. According to Deloitte and Touch the increase in

wages in 2002/2003 is the lowest in the Premier League's history. Analysis of only

the costs would suggest that many clubs wish to maximise utility, as discussed in

Chapter 3, where playing success is weighted with greater importance than cost

control. However this does not necessarily mean that clubs do not price as profit

maximisers.

We can consider why these costs have become out of control using a simple static

game. If we assume that there are only two teams in the league and that acquiring

better players, who command higher wages, leads to greater success. Also assuming

that clubs have the following preferences; spend money = -1, don't spend = 0, have all

best players = 4, share best players = 2, we can construct the payoff matrix as in

figure 4 (team 1's payoff appears as the first co-ordinate).

Figure 4.1 Payoff Matrix for Expenditure on Players

Team 2

Spend Don't Spend

Team 1 Spend 1,1 3,0

Don't Spend 0,3 2,2

34
"Spend" refers to a team willing to pay above average wage levels in order to attract

the best players from the other team. If both "Spend" or if both "Don't Spend" then

players do not move between clubs. The Nash outcome is that both teams spend

money on players with payoff 1,1. However both would be better off by agreeing not

to raise wages, as shown by the 2,2 payoff if both don't spend excessively. This Pareto

optimal outcome is not achieved because there is an incentive to 'cheat' and offer

higher wages in the knowledge that the other team won't, and thus gain higher utility

3. This could be an argument for a salary cap to be imposed in football, as neither

team is able to commit itself to lower costs.

4.2 Effects on Demand for Football

The demand for football makes up a large part of the existing literature and in this

Section I shall consider some of it. In many cases the terms demand and attendance

are interchanged but this can be misleading. As Section 2.2 discusses clubs face

capacity constraints, these constraints mean that demand equations may not be

accurately represented by attendance models. If supply is not perfectly elastic (i.e.

capacity constraints are binding) then any single equation regression model based on

that data would underestimate actual demand and reveal nothing but the capacities of

stadia. Although there are techniques to allow valid estimation with constrained data,

a mixture is needed. Consequently using the most recent attendance data alone to

estimate a demand function is not a possibility. Never the less many demand studies

have taken demand to be synonymous with attendance. Whilst I will similarly use

this approach it should be noted that there are a number of associated problems with

35
this entwining of terms. In doing so we are also assuming that those who 'demand'

football matches can be satisfied simply by purchasing a ticket.

Of the many studies on demand for English professional football a consensus of what

affects the demand for football can be split into three main categories - economic

factors, socio-economic factors and football specific factors. Price and income are the

two economic factors that are given most attention. Of the football specific factors,

league position, age of club, goals scored, promotion/relegation, championships won

and uncertainty of outcome are all considered. Some socio-economic factors that

have been looked at in the literature include geographic and demographic features,

weather, television, seasonality and even racial composition.

It is necessary to distinguish between long run effects, such as price and income, and

short run effects such as those above. The effect of long term variables is more

complex. Many studies have produced low price elasticities (price inelastic)

suggesting price has a smaller effect on demand than other variables. Downward and

Dawson (2000) argue the results are dependent on the technique employed in

estimating demand equations. Peel and Thomas (1992) argue that admission price

appears to be endogenous and so exclude it from their demand equation altogether.

Simmons (1996) allows for the distinction between season ticket and non-season

ticket admission, finding a higher price elasticity when correcting for season ticket

admission. This supports the idea that 'casual' spectators are more sensitive to price

changes than season ticket holders.

36
The effect of income also generates mixed outcomes. Bird (1982) for example found a

negative income elasticity suggesting that football is an inferior good over the period

1948-1980. That is as income falls, attendances rise. One possible explanation is that

football is traditionally seen as a working class game, and factors such as a feeling of

belonging and camaraderie are intensified in 'hard times'. An alternative view is that

recent investment and improvements in Premiership Stadia may result in attendances

rising with income. Many other studies have not found the same relationship as Bird.

Simmons (1996) for example uses a club level analysis over the period 1962-1992

and finds long-term income effects on only 5 clubs and in all cases the effect is

positive. To account for both views Baimbridge et al. (1996) use a quadratic

specification for their income variable of earnings. Consequently they find both

inferior and normal characteristics.

4.3 Estimated Demand Functions

I shall now take a closer look at some of the more recent football attendance studies.

Downward and Dawson (2000) observe that too many studies have focused on the

short term football specific factors that affect attendances. Long term economic

effects have tended to be neglected. However studies by Simmons (1996) and

Dobson and Goddard (1995 and 2001) have gone some way to rectify this which I

shall discuss later.

The two earliest and perhaps most referred to papers are by Hart et al. (1975) and

Bird (1982). Hart et al. (1975) carried out the first statistical analysis of attendance

analysing short-term variation for four first division clubs. They found that

population and distance travelled by away support both have significant effects on

37
attendance. The calibre of the opposing team is also considered important to fans.

However league position is seen to be limited in its explanatory power, as is the time

trend employed. Tests for television, weather and 'seasonality' factors (e.g. Christmas

fixtures) confirmed some influence on attendance. Bird (1982) estimates a demand

equation for football attendances for period 1948-1980. Unlike many other's (before

and since) Bird incorporates transportation costs as well as cost of admission into his

equation. Bird's main findings are inferiority of football and that admission costs are

more significant than transportation costs. There is no support for weather,

hooliganism or goals scored as determinants.

Baimbridge et al. (1996) focus on the effects of satellite television on football

attendance. They use 36 explanatory variables to estimate a demand equation. It is

interesting to note that the price variable (and earnings, distance and others) is

specified as a quadratic term. This is because they believe that football only becomes

price sensitive after a given point, and preferred because of previous studies' failings.

Further they find that the mean ticket price in 1993/94 season (£10.26) is greater than

the stationary point15 of £7.72 - and conclude that at that time clubs experienced both

increasing support and revenue as a result of being on the positive part of their

demand functions. They find that satellite television coverage of matches for Monday

games does have a negative effect on attendance, but the fall in attendance is more

than offset by the money received from that coverage. Whilst for Sunday games,

television fees are pure revenue for clubs (i.e. attendances do not fall). Other results

suggest away support, star players, distance and home population are all significant.

15
Baimbridge et al. find: Attendance = …-0.38939P + 0.025P2 +… where P is price.
Hence stationary point occurs where ∂Att/∂P=0, i.e. if P=7.72.

38
One puzzling result is a negative signed dummy variable for the champions,

indicating a 61% fall in attendance for the winners of the league!

Szymanski and Smith (1997) consider the industrial structure of English football. In

their model of the English football league they estimate revenue, cost, production and

demand (for attendance) functions from a data set of 48 clubs over seasons 1974-

1989. The demand function in logarithmic form relates annual average league

attendance with price, where price is given here by gate revenue per person and is

deflated by the Retail Price Index (RPI) measure of inflation. Their results suggest an

inelastic price elasticity of demand and significance for division, promotion and

relegation dummies.

Two of the more recent studies of demand are those by Dobson and Goddard (1995

and 2001) and Simmons (1996). They use modern econometric methodology, which

creates statistical confidence in their findings. Cross-sectional studies such as Hart et

al. (1975) are limited in the ability to explain long run effects such as price, income

and unemployment. A time series approach such as Bird (1982) has an advantage

when looking for long term effects since demographic and attractiveness factors are

likely to be cancelled out over a season. Collinearity among independent variables

may arise though, where variables are completely predicted by other variables leading

to 'weighting' problems. There is also concern about the inferences that can be drawn

from such studies. For example although income falls and attendances rise in the

period covered by Bird, it does not necessarily mean that the fall in income caused the

rise in attendance. Consequently Dobson and Goddard 'detrend' their data, by

'normalising' price, attendance and goals scored, prior to ordinary least squares

39
estimation of the demand equation. Simmons (1996) uses a more econometrically

robust method using an error correction model. This relates the movement of

variables in one period to the previous periods deviation from long run equilibrium.

Although Simmons is arguably more statistically sound, I will not be using it for the

basis of the test in Chapter 5 as it covers only some of the clubs I wish to examine.

As a result club specific intercepts estimated by Simmons are not available for some

of the clubs in the Premiership in the season 2002/2003.

Thus for the purpose of the empirical test in Chapter 5, I will use the attendance

equation estimated by Dobson and Goddard (2001). The equation represents an ex

post study where attendance is shown at the end of the season to depend upon final

league position (lsi), goals scored (gsi) and ticket price (psi). Of course when deciding

whether to attend a match or not the fan does not know the final league position or

goals scored. The use of this equation implicitly assumes that attendance and league

position are at their steady state levels. Consequently if this is not the case then

calculations may differ. Dummy variables such as promotion and relegation are set to

zero for simplicity. I have selected this equation for a number of reasons, not least

because their estimation provides club specific coefficients for all teams involved in

this study. Their study is the most up-to-date in the sense that it includes data from

1947-1997. The use of this time series data with lagged variables allows the capture

of long term economic effects of price and income for example. During the data

period the impact of capacity constraints can be considered as small, however in some

cases using (any) attendance equations as a proxy for demand may lead to

underestimation of demand, since once capacity is reached we don't know how much

more demand there is. The sign and significance of the coefficients, being as

40
expected in the majority of cases, creates confidence in their equation. There is little

evidence of serial correlation in residuals and so estimation is carried out using

ordinary least squares. Heteroscedasticity, where variation in errors may cause

misleading estimates, is accounted for using White's (1980)16 adjustment. A further

benefit is that the data I have used below is not used in the estimation of their

equation.

16
White, H (1980) A Heteroscedasticity-consistent covariance matrix estimator and a direct test for
heteroscedasticity, Econometric, 48, 817-838 as cited in Dobson and Goddard (2001).

41
V. Empirical Test For Profit Maximisation

The remainder of this dissertation is concerned with an empirical test to see whether

Premiership football clubs price as profit maximisers for the season 2002/2003.

Whilst anecdotal evidence such as that discussed in Chapter 3 is a worthwhile

exercise, it is desirable to have statistically robust results via an empirical test. In this

chapter I present a statistical test and find that fifteen clubs can be categorised as

profit maximisers with regards to pricing.

5.1 The Data and Model

The Data

Before proceeding it is important to acknowledge some problems with attendance and

ticket price data. For example attendance data does not distinguish between season

ticket holders and non-season ticket holders. Simmons (1996) does distinguish

between the two in his study of attendance and finds that non-season ticket holders are

more sensitive to ticket price changes. Ticket prices are just one cost of attending a

football match, which also includes transport costs and refreshments for example, and

so can underestimate the actual price of attending a match. An implicit assumption

here is that if one ticket price changes so do all others by the same proportion. One

can then apply the composite good theorem and use average price as a representation

of price without losing the behavioural properties present in single price analysis. If

there is a slight deviation form strict proportionality then this theorem may not hold.

Also estimation of this price uses accounting data which although is 'true and fair'

may not be 100% accurate. However the way average ticket price is calculated -

dividing match day revenue by attendance - means programme sales and refreshments

42
are also included in this price and so are more likely to reflect the true cost of

attending a match.

I have gathered data on attendance for all four English football divisions17. This

allows me to calculate the mean and standard deviation of the logarithm of average

attendance needed later. Table 5.1 shows the total league attendance, the total league

gate receipts and the calculated average price of each team in the season 2002/2003.

Average price was obtained by dividing each club's league gate receipts (or match day

revenue) by their total league attendance. League gate receipts were obtained by

dividing total gate receipts by the total number of home games (league plus cup

games) and multiplying by 19 (the number of league games). The purpose of this was

to isolate league gate receipts in the cases where only total gate receipts were

reported18. Using this I can calculate the mean and standard deviation for average

price across all Premiership teams. Indeed I find the mean ticket price (µ p) for

season 2002/2003 to be 19.55, and the standard deviation19 (σ p) to be 6.85.

Standardised price is then calculated by subtracting the mean from the price and

dividing by the standard deviation. I have similarly calculated standardised goals

scored and a league position score for each club20. The use of this will be seen below

where the demand equation is in terms of standardised price (psi), logarithm of

attendance (asi), league position (lsi) and goals scored (gsi).

17
See Appendix 3
18
This assumes that gate revenue from cup, league and champions league games are similar.
19
Unfortunately in the case of Middlesbrough, data on the breakdown of revenue were unavailable and
so the mean and standard deviation have been calculated with this team omitted.
20
See appendix 4

43
Table 5.1 Attendance, Turnover, Gate Receipts and Calculated Ticket Price 2002/2003

Club Total League Total Total Gate (Estimated) (Estimated)

Attendance Revenue Receipts League Gate Average
(£000's) (£000's) Receipts Ticket Price
(£000's) (£)
Arsenal 722,779 117,831 27,907 17,674 24.45
Aston Villa 664,525 45,447 9,732 8,039 12.10
Birmingham City 549,252 36,480 25,817* 11,226* 21.51
Blackburn Rovers 498,294 45,438 8,485 6,200 12.44
Bolton Wanderers 475,266 30,791 5,758 5,210 10.96
Charlton Athletic 498,864 35,141 9,681 8,759 17.56
Chelsea 755,896 75,136 24,569† 19,450 25.73
Everton 731,329 46,781 14,697 14,697 20.10
Fulham 317,433 33,640 7,178 5,051 15.90
Leeds United 743,280 64,005 12,264 10,700 14.40
Liverpool 821,617 102,504 N/A 21,288 25.91
Manchester City 656,735 49,028 9,524 8,617 13.12
Manchester United 1,284,476 173,000 70,600 40,648 31.65
Middlesbrough 589,475 40,229 N/A N/A N/A
Newcastle United 986,537 96,449 32,728 23,031 23.35
Southampton 582,920 48,875 18,339 13,402 22.99
Sunderland 754,262 42,454 12,130 10,476 13.89
Tottenham Hotspur 682,043 65,033 25,520 23,686 34.73
West Bromwich Albion 507,794 28,445 5,298 5,298 10.43
West Ham United 653,714 51,712 14,653 13,257 20.28

Notes: * for Birmingham gate receipts revenue includes FA and football league distributions - this I
have calculated to be approximately £14m - (£500,000 per league position plus approx. £10m
payment). One League Cup game is also taken into account.
†
Chelsea ticket revenue is calculated as 32.7% of total revenue as implied by The Deloitte
Football Rich List (2004)
(N/A = not available)

Source: all figures quoted or calculated from individual clubs' annual reports 2002/2003, except total
attendance which was obtained from www.statmail.co.uk.

The Model

44
It is assumed that clubs do price as profit maximisers (the null hypothesis) such that at

the beginning of a season they decide upon a price to maximise revenue subject to

their capacity constraint21. This assumption of a club's behaviour implies restrictions

on the first and second derivatives as reported by Ferguson et al. (1991). That is for

non sell-out teams ∂Ri/∂Ai = 0 and ∂R2i/∂ 2Ai ≤ 0, and for sell-out teams ∂Ri/∂Ai ≥ 0

and ∂R2i/∂ 2Ai unrestricted. The conditions for the non sell-out teams are the standard

necessary conditions for a maximum. The conditions for sell-out teams suggest they

be on the increasing part of the marginal revenue curve, since they would like to

supply more but are constrained by capacity. Using the data in table 2.1 I have

defined the sell-out teams to be those that sell out for 90% or more of games. These

are depicted with a star in table 5.2 below.

Proceeding with the Dobson and Goddard (2001 pp.353) steady state demand

equation (equation 5.1) one can obtain an inverse demand function (equation 5.2).

asi = γ i + δ 1ilsi + δ 2ipsi + δ 3igsi (5.1)

⇒ psi = (asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i

But since psi = (Pi-µ P) / σ P

⇒ Pi = [σ p(asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i] + µ p (5.2)22

21
At the profit maximising price the marginal cost of supplying a game should equal the marginal
revenue. But since marginal cost is zero (discussed in Chapter 4) the condition is for marginal revenue
to equal zero, that is, to maximise revenue.
22
Notation: asi = (ln(Ai)-µ A) / σ A, and gsi = (Gi-µ G) / σ G , where ln(Ai) is the natural logarithm of
average attendance for team i. Pi is the club's average admission price and Gi is goals scored by each
team. lsi is the league position score defined as 92 for first place, 91 for second place and so on. µ and
σ represent the mean and standard deviation for each variable, with µ A and σ A being across all 92
league clubs but µ P, µ G, σ P, σ G across only Premiership teams. Appendix 4 shows the values for
the coefficients δ 1i, δ 2i, δ 3i, and intercept, γ i, for each club.

45
To obtain an expression for revenue per game for club i (Ri) the inverse demand

equation is multiplied by quantity (average attendance, Ai), such that:

Ri = Pi. Ai = Ai {[σ p(asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i ] + µ p} (5.3)

From equation 5.3 we can deduce that23

∂Ri/∂Ai = µ p + [σ p (ln(Ai)- µ A - γ iσ A - δ 1ilsiσ A - δ 3igsiσ A +1) / δ 2iσ A]

(5.4)

and

∂ 2Ri/∂A2i = σ p / (Aiδ 2iσ A) (5.5)

By substituting out δ 2i in equation 5.4, marginal revenue can be represented as

equation 5.6a.

∂Ri/∂Ai = Pi + [(Pi - µ p) / σ A (asi - γ i - δ 1ilsi - δ 3igsi)]

(5.6a)

= Pi + [(Pi - µ p) / (σ A Xi)] (5.6b)

Similarly equation 5.5 becomes

∂ 2Ri/∂A2i = (Pi - µ p) / [σ A Ai(asi - γ i - δ 1ilsi - δ 3igsi)] (5.7a)

= (Pi - µ p) / (σ AYi) (5.7b)

23
See Appendix 5 for derivation of these derivatives

46
Using equations 5.6a and 5.7a, and the data presented in table 5.1 and appendix 4, I

have calculated the first and second derivatives of the revenue function with respect to

average attendance for each club. These are presented in table 5.2 below.

5.2 Analysis of Results

Columns 2 and 6 of table 5.2 give the computed values of the first and second

derivatives respectively. Because the values of the first derivatives are not zero, I

need to determine which are significantly different from zero. To carry out such a test

I will refer the test statistic, Z, where Z is equation 5.6b, to a standard normal

distribution24. In order to do this I need to calculate the expectation and variance of Z.

However because both P and X vary in Z, I will need to use the propagation of error

method (see Rice (1995) page 149). Doing this25 I obtain E(Z) = 12.65, Var(Z) =

376.223 and therefore SD(Z) = 19.3965. I can now subtract the mean, E(Z), from Z

and divide by its standard deviation, SD(Z). The absolute value can then be referred to

the given values in the normal tables to obtain a significance level for the hypothesis

that the first derivative is zero. Table 5.2 contains the results. Column 3 gives the

normalised test statistic; column 4 shows the numbers returned from the normal

distribution tables and column 5 the corresponding significance level. This tells us

that only 5 clubs' first derivatives are statistically different from zero at the

conventional one, five and 10% levels. Consequently 4 teams do not satisfy the first

order conditions.

Using the same method for the second derivative I find only Tottenham Hotspur has a

second derivative that is significantly different from zero (at 10% level). Therefore

24
See Appendix 6 for justification
25
See Appendix 7 for derivation of expectation and variance.

47
all clubs satisfy the necessary second order conditions since all can be thought of as

zero except Tottenham Hotspur whose second derivative is positive but second order

condition requirement is unconstrained. I can conclude therefore that 15 clubs meet

Table 5.2 First and Second Order Derivatives of the Revenue Function for the 20
Premiership Teams in 2002/2003.

Club Zi = Zi - E(Z) Value Significance ∂ R2i/∂ 2Ai

SD(Z) returned level at which
from normal first
∂ Ri/∂ Ai tables; derivative
P(Z ≤ IZiI) different
from zero
Arsenal* 10.4316 -0.11437 0.5438 -0.00036851

Aston Villa 0.98305 -0.6015 0.2743 -0.00031785

Birmingham City 46.5074 1.74554 0.9599 10% 0.00086472

Blackburn Rovers -87.2922 -5.15259 1 1% -0.00380280

Bolton Wanderers 57.0601 2.289596 0.989 5% 0.00184297

Charlton Athletic* 22.4725 0.506408 0.695 0.00018710

Chelsea 50.8548 1.969674 0.9756 5% 0.00063153

Everton 21.3802 0.450094 0.6736 0.00003326

Fulham 38.9867 1.357806 0.9131 0.00138186

Leeds United 12.0424 -0.03133 0.512 -0.00006027

Liverpool 31.7321 0.983792 0.8365 0.00013464

Manchester City -7.9188 -1.06044 0.8554 -0.00060867

Manchester 34.9639 1.15041 0.8749 0.00004902

United*
Middlesbrough N/A N/A N/A N/A N/A

Newcastle United* 25.4636 0.660615 0.7454 0.00004071

Southampton 34.3246 1.117448 0.8686 0.00036945

Sunderland 4.2968 -0.43066 0.6664 -0.00024165

Tottenham 148.8612 7.022464 1 1% 0.00317941

Hotspur*
West Bromwich -1.1204 -0.70994 0.7611 -0.00043218
Albion
West Ham United 19.4489 0.350522 0.6368 -0.00002416

48
*depicts sell-out teams

the specified first and second order conditions for profit maximisation, which are

shown in table 5.3. Only Birmingham, Blackburn, Bolton and Chelsea do not.

These results are somewhat surprising, as they tend to support the profit maximising

assumption, which is seen by many as unrealistic for European sports. Perhaps the

existence of the Premier League and the financial benefits to be gained from it has

encouraged football clubs to act like a business primarily and an entertainment

provider second. More likely, due to the fact that only six clubs made profits in

2002/03, clubs try to maximise their matchday revenue in order to offset their

spending on players as best they can. We can't therefore conclude that clubs are profit

maximisers only that they price like profit maximisers would.

Table 5.3 Ownership and Objectives

Club Sell-out First and Second Quoted on AIM,
team? Order Conditions LSE or OFEX?*
Met?
Arsenal ✓ ✓ ✓
Aston Villa ✓ ✓
Birmingham City ✓
Blackburn Rovers
Bolton Wanderers ✓
Charlton Athletic ✓ ✓ ✓
Chelsea ✓
Everton ✓
Fulham ✓
Leeds United ✓ ✓
Liverpool ✓
Manchester City ✓ ✓

49
Manchester United ✓ ✓ ✓
Middlesbrough - - -
Newcastle United ✓ ✓ ✓
Southampton ✓ ✓
Sunderland ✓ ✓
Tottenham Hotspur ✓ ✓ ✓
West Bromwich Albion ✓ ✓
West Ham United ✓ ✓
(*Source: www.football-research.org/stateofthegame2002-chapter-1.htm#quotedfootballclubs)

Either there are underlying reasons as to why 4 clubs are utility maximisers or, due to

the nature of the test they have been found to not satisfy the conditions even though

they are profit maximisers or similarly those found to be profit maximisers are

actually not. Some reasons as to why they could be utility maximisers are given

below. Table 5.3 above shows ownership structure of the teams. Since only one of

the 4 clubs was not a listed club, this can not be seen to explain the results. Though in

Blackburn's case the absence of pressure to deliver shareholder dividends may be a

reason. Note also that all sell-out teams met the necessary conditions.

Of the four clubs that didn't satisfy the conditions two can be considered bottom half

of the table teams, where there is a greater uncertainty as to their future within the

Premiership (due to a greater threat of relegation). These clubs may be more focused

on achieving survival than profit. The other two, Blackburn and Chelsea, were teams

that fill the top positions challenging for the Premiership title. In the past or present

they have been seen to spend more on buying players to try to satisfy their fans'

demands and so may be more focused on achieving success than profit.

More worryingly is that of the four that did not meet the conditions for maximisation

Bolton and Birmingham actually made accounting profits. Since only six made

profits in the whole league this could cast doubt on the reliability of my model.

50
However their profitability is more likely due to their low wage bills rather than their

pricing techniques.

Of course, due to the nature of the test, with both price and X allowed to vary, it is

likely that the findings could be influenced by the performance variables and the

estimated intercept and coefficients used in X. Consequently the failure to meet the

revenue maximisation conditions could be a result of under-performance on the pitch,

reflected in league position and goals scored coefficients, or poor attendance as well

as price. Indeed all four clubs have relatively low capacity utilisation. Additional

uncertainty of the results arises from the estimated price standard deviation, which is

used to calculate the partial derivatives.

5.3 Policy Implications

I emphasise here that this model of ticket price is just one decision a football team has

to make. Ideally one would also look at the market for playing talent as decisions

regarding the price of tickets and amount of playing talent are made simultaneously

(see Kesenne (2002)). A common criticism is that too many studies focus on one

argument and fail to pay attention to alternatives. For example although my model

has shown pricing to be consistent with profit maximisation conditions for 15 clubs, it

could be that this is consistent with utility maximisation too.

One can assume that one aim of the league is to maintain competitive balance, as it is

this that creates the greatest interest, as Neale (1964) first revealed. Competitive

balance can also be seen as a benefit to the public by way of spreading top teams

across the country. It is debatable as to whether revenue sharing can lead to such

51
balance. Kesenne (2002) argues it does under win maximisation, whereas under

profit maximisation it has shown not to by Fort and Quirk (1995). Therefore my

results could suggest that greater revenue sharing would have little effect on

competitive balance. In 1999 the Office of Fair Trading challenged the right to allow

the collective selling of broadcast rights and argued this restricts the supply of live

games and allows higher prices to be charged to viewers. But it also allows clubs to

receive more revenue, needed to maintain competitive balance or just survive, than

they would by negotiating individually. So there is also a case for increased revenue

sharing particularly with the financial gap between the top and lower teams.

If teams were profit maximisers, one might assume that a competitive market with

many clubs would be desirable in order to restrict clubs ability to set prices

(alternatively one could argue for a maximum ticket price to be imposed). However

since there is doubt as to whether this is the case for all clubs, a reduction in the size

of the Premiership may not result in higher costs to consumers. In fact it could lead to

a more focused league with a smaller number of more evenly balanced teams. If we

assume the public prefers uncertainty to dominance then this change could raise

attendances and have positive welfare effects. On the other hand, Szymanski and

Smith (1997) point out that football has aspects of a quasi-public good in that it

provides entertainment to the wider public. Expansion of the league therefore could

bring this entertainment to more cities around the country and so could increase fans'

welfare. The effects of this could be wide and are not the focus of this dissertation,

though I will note that Kesenne (2002) shows that under both objective assumptions a

maximum ticket price leads to a decrease in the demand for talent, as one might

expect.

52
Profit maximisers have less incentive to monopolise playing talent and so an

argument put forward is that there is less need to regulate the labour market. For

example imposing transfer windows (where you can only buy and sell players during

a certain period) is not necessary and indeed could counteract competitive balance as,

for example, it prevents smaller clubs from improving their squads after injuries. On

the other hand if clubs are win maximisers then Kesenne (2002) shows that

competitive balance can be threatened if there is no market regulation. If a league

consists of both utility and profit maximisers then this could be a source of

competitive imbalance too. Profit maximisers may also accept salary caps, as this is a

cost minimising action. Although the full effects of such policies go beyond the

scope of this study, it could be argued this too would lead to a redistribution of

playing talent since it will eliminate the financial incentive to join a 'rich' club.

On a broader level if indeed a football team can be thought of as a traditional firm

with respect to its objectives and behaviour, the Premiership can be used as the

subject of economic studies at a micro level. This is particularly appealing due to the

recent availability of firm level data with regards to player productivity, managerial

input and individual performance, which has enabled research into areas such as the

estimation of production functions (see Carmichael et al. (2001) for example).

53
VI. Conclusion

6.1 Concluding Remarks

In summary the dissertation has attempted to identify and critically evaluate the

structure and objectives of the Premiership Football industry. I have argued that clubs

are most likely local monopolies, whilst the league shows oligopolistic behaviour. I

have evaluated circumstantial evidence regarding profit and utility maximisation and

implemented a test in an attempt to provide a conclusive answer. In the process I

have also considered the demand for football and the associated literature. A closer

look at the clubs' costs, although not incorporated into my test, has allowed an insight

into the financial difficulties many clubs have been presented with. A model based on

the market for playing talent in conjunction with the price setting behaviour of clubs

would allow for further insights into the industry.

The results of the test carried out in this study fail to reject the profit maximising

assumption in the pricing of tickets for a majority of teams. The evidence presented

however is not irrefutable, and I have not provided evidence to rule out multiple

objectives. Nor have I shown that the utility maximisation hypothesis can be rejected

and therefore it remains a possibility. Perhaps the best way to describe the objectives

of a club therefore is via a utility function dependant on playing success, profit and a

number of smaller attributes, but with some clubs placing a greater weight on profit

54
than others. The peculiar structure of football and its stakeholders allow this

combination.

6.2 Ideas for Further Research

Given the criticisms of the various approaches to determining profit maximising

behaviour, be it through elasticities or price setting behaviour, it is unclear whether a

precise conclusion is possible. Development of a model that can make such a

distinction would be ideal.

Further Research into the utility maximisation assumption would provide an

alternative argument to the one presented here. Similarly little attention has been

given to other possible objectives such as survival, cost minimisation or sales

maximisation. A model based on all aspects of a club's behaviour, including both

costs and revenues, would also reveal more about the objectives of club.

Extension of existing models to the football league clubs would reveal more about the

industrial structure of the entire English football industry. Extension to other

European leagues would similarly provide insights into the Europe versus American

objectives debate. Indeed a closer comparison to American sports' structure and

behaviour could reveal policy insights.

55
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59
Appendix 1 - The Premiership, The FA and League Table

The Premiership

The English Premiership differs from US sports leagues where revenue sharing is

common and franchises are awarded on the basis of local interest. The FA Premier

League (or Premiership) was formed in 1992 and involved the top clubs in English

football breaking away from the other 72 professional clubs to form an elite league.

The 92 professional clubs are split into 4 leagues: the Premiership (or Premier

League), The Championship, League 1 and League 2. Before 2004 these were known

as the Premiership, Division 1, Division 2 and Division 3. There is a system of

promotion and relegation between the leagues. For example the top three clubs (one

via playoff) of The Championship replace the bottom three clubs of the Premiership

each season.

The Premiership consists of 20 football teams that compete against each other with

the (sporting) aim of finishing highest in the league, by winning as many football

matches as they can. The higher a club finishes the more prize money they receive

and the top six clubs gain entry into lucrative European competitions. Clubs play each

other twice hence each club plays 38 league games per season - 19 at 'home' and 19

'away'.

60
The Football Association

The Football Association (FA) is the governing body of football in England. It is

responsible for promoting and developing the game at every level.

FA Premiership League Table 2002/2003

Pos TEAM PL W D L F A PTS

1 Manchester United 38 25 8 5 74 34 83
2 Arsenal 38 23 9 6 85 42 78
3 Newcastle United 38 21 6 11 63 48 69
4 Chelsea 38 19 10 9 68 38 67
5 Liverpool 38 18 10 10 61 41 64
6 Blackburn Rovers 38 16 12 10 52 43 60
7 Everton 38 17 8 13 48 49 59
8 Southampton 38 13 13 12 43 46 52
9 Manchester City 38 15 6 17 47 54 51
10 Tottenham Hotspur 38 14 8 16 51 62 50
11 Middlesbrough 38 13 10 15 48 44 49
12 Charlton Athletic 38 14 7 17 45 56 49
13 Birmingham City 38 13 9 16 41 49 48
14 Fulham 38 13 9 16 41 50 48
15 Leeds United 38 14 5 19 58 57 47
16 Aston Villa 38 12 9 17 42 47 45
17 Bolton Wanderers 38 10 14 14 41 51 44
---------------------------------------------
R 18 West Ham United 38 10 12 16 42 59 42
R 19 West Bromwich Albion38 6 8 24 29 65 26
R 20 Sunderland 38 4 7 27 21 65 19

61
Appendix 2 - 5 year correlation data for league position (1st place = 20, 2nd place =
19…), attendance and operating profit.

league position
Club 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003
Arsenal 19 19 19 20 19
Aston Villa 15 15 14 13 5
Birmingham City 5 5 2 1 8
Blackburn Rovers 7 2 4 11 15
Bolton Wanderers 4 4 3 5 4
Charlton Athletic 8 7 13 7 9
Chelsea 18 16 16 15 17
Everton 10 9 7 6 14
Fulham 2 3 5 8 7
Leeds 17 18 17 16 6
Liverpool 14 17 18 19 16
Manchester City 1 6 6 3 12
Manchester United 20 20 20 18 20
Middlesbrough 13 10 9 9 10
Newcastle United 11 11 11 17 18
Southampton 9 8 12 10 13
Sunderland 6 14 15 4 1
Tottenham Hotspur 12 12 10 12 11
West Bromwich Albion 3 1 1 2 2
West Ham United 16 13 8 14 3

Attendance (average)
Club 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003
Arsenal 38,052 38,033 37,975 38,054 38,041
Aston Villa 36,894 31,697 31,523 35,011 34,975
Birmingham City 20,794 21038 21283 25,976 28,883
Blackburn Rovers 25,761 19166 20740 20017 26,225
Bolton Wanderers 18,201 14383 15796 25,098 25,016
Charlton Athletic 19,928 19557 20,023 24,096 26,255
Chelsea 34,751 34,079 34,700 39,072 39,784
Everton 36,202 34,828 34,130 33,602 38,480
Fulham 11,387 13092 14984 19,343 16,707
Leeds 35,845 39,155 39,016 39,751 39,119
Liverpool 43,321 44,074 43,699 43,343 43,242
Manchester City 28,273 32088 34,058 33058 34,564
Manchester United 55,188 58,017 67,543 67,557 67,601
Middlesbrough 34,389 33,393 30,747 28,458 31,025

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Newcastle United 36,552 36,315 51,308 51,372 51,923
Southampton 15,140 15,131 15,115 30,632 30,680
Sunderland 38,745 41,375 46,791 46,744 39,698
Tottenham Hotspur 34,174 34,912 35,195 35,000 35,897
West Bromwich Albion 25,396 14583 17111 20553 26,730
West Ham United 25,672 25,093 25,697 31,356 34,432

Profit £ ,000
Club 1998/1999 1999/2000 2000/2001 2001/2002 2002/2003
Arsenal 1366 14067 26272 -20562 4008
Aston Villa 12855 -4932 -1012 -1368 -11426
Birmingham City -212 -1027 -42 -2716 10730
Blackburn Rovers -10864 -12005
Bolton Wanderers 1279 5543
Charlton Athletic -7082 -464
Chelsea -10476 -15277
Everton -3653 1555 -12,980
Fulham -33,596 -20,800
Leeds -33875 -49505
Liverpool 6041 2304
Manchester City -13882 -14103
Manchester United 18534 14699 18832 14914 26317
Middlesbrough -11922 -10404
Newcastle United -3079 4293
Southampton 2477 -418
Sunderland -3537 -20328
Tottenham Hotspur 846 58 -2495 467 -6425
West Bromwich Albion 1687 1649 -507
West Ham United -3502 -5266

Note:

The correlation coefficient of two data sets X and Y is equal to:

COV(X,Y) / σ Xσ Y

where COV(X,Y) = Σ (Xi - µ x)(Yi- µ y) is the covariance of X and Y

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Appendix 3 - Attendance Data 2002/2003
Club Average ln(A)
Manchester United 67,604 11.1214224319
Newcastle United 51,923 10.8575171309
Liverpool 43,243 10.6745906496
Chelsea 39,784 10.5912201004
Sunderland 39,698 10.5890560876
Leeds United 39,120 10.5743891241
Everton 38,491 10.5581797267
Arsenal 38,041 10.5464198044
Tottenham Hotspur 35,897 10.4884090055
Aston Villa 34,975 10.4623887995
Manchester City 34,565 10.4505968884
West Ham United 34,406 10.4459862468
Middlesbrough 31,025 10.3425486101
Southampton 30,680 10.3313662555
Birmingham City 28,908 10.2718736524
West Bromwich Albion 26,726 10.1933921533
Charlton Athletic 26,256 10.1756498133
Blackburn Rovers 26,226 10.1745065641
Bolton Wanderers 25,014 10.1271909471
Fulham 16,707 9.7235830723

Leicester City 29,231 10.2829850689

Wolverhampton 25,745 10.1559957125
Derby County 25,470 10.1452565680
Ipswich Town 25,455 10.1446674663
Nottingham Forest 24,437 10.1038536562
Norwich City 20,353 9.9209836002
Sheffield Wednesday 20,327 9.9197053306
Portsmouth 18,934 9.8487145267
Sheffield United 18,069 9.8019530417
Crystal Palace 16,867 9.7331143293
Reading 16,011 9.6810312650
Coventry City 14,813 9.6032604526
Stoke City 14,588 9.5879545519
Burnley 13,977 9.5451684005
Preston North End 13,853 9.5362570947
Watford 13,405 9.5033830507
Bradford City 12,501 9.4335639201
Millwall 8,511 9.0491147235
Gillingham 8,082 8.9973946456
Rotherham United 7,522 8.9255873390

64
Walsall 6,983 8.8512339028
Brighton & Hove Albion 6,651 8.8025224983
Grimsby Town 5,884 8.6799920817
Wimbledon 2,786 7.9323621543

Queens Park Rangers 13,206 9.4884265508

Cardiff City 13,050 9.4765434128
Bristol City 11,890 9.3834529897
Barnsley 9,758 9.1858427404
Huddersfield Town 9,506 9.1596784572
Plymouth Argyle 8,984 9.1032004964
Tranmere Rovers 7,877 8.9717023997
Wigan Athletic 7,288 8.8939844389
Blackpool 6,991 8.8523788865
Luton Town 6,747 8.8168532406
Crewe Alexandra 6,735 8.8150730888
Oldham Athletic 6,699 8.8097135405
Notts County 6,154 8.7248575559
Wycombe Wanderers 6,002 8.6998480260
Brentford 5,759 8.6585191275
Stockport County 5,492 8.6110477669
Swindon Town 5,440 8.6015343398
Northampton Town 5,211 8.5585270549
Peterborough United 4,951 8.5073448554
Mansfield Town 4,887 8.4943338973
Cheltenham Town 4,655 8.4456971897
Port Vale 4,436 8.3975083485
Chesterfield 4,108 8.3206915710
Colchester United 3,387 8.1276998528

Hull City 12,846 9.4607877578

Bristol Rovers 6,934 8.8441921262
Oxford United 5,862 8.6762461213
AFC Bournemouth 5,829 8.6706007380
Swansea City 5,160 8.5486918585
Hartlepool United 4,943 8.5057277133
Carlisle United 4,776 8.4713586551
Rushden and Diamonds 4,330 8.3733228210
Wrexham 4,265 8.3581974599
Leyton Orient 4,257 8.3563199658
York City 4,176 8.3371091296
Cambridge United 4,173 8.3363904806
Southend United 3,951 8.2817239904
Lincoln City 3,924 8.2748668207
Exeter City 3,763 8.2329717906
Scunthorpe United 3,692 8.2139235956
Shrewsbury Town 3,656 8.2041249326
Darlington 3,312 8.1053075155
Bury 3,257 8.0885618053
Torquay United 3,132 8.0494270571
Boston United 3,049 8.0225689470
Kidderminster 2,895 7.9707403900
Rochdale 2,740 7.9157131994
Macclesfield Town 2,110 7.6544432265

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Mean 9.2167839171
Standard Deviation 0.8778699435

Appendix 4 - Demand Equation Data

The table below gives the coefficients and intercept of the demand equation as
calculated by Dobson and Goddard (2001 pp. 348-349). I have calculated, for the
season 2002/2003, standardised goals scored (gsi), standardised logarithm of average
attendance (asi) and league position score (l si) - specified by Dobson and Goddard as
92 for the team finishing top of Premiership, 91 for the second team etc.

Club γ δ 1i δ 2i δ 3i gsi asi l s

i

Arsenal 0.199 0.016 -0.051 0.107 2.407218724 1.514616028 91

Aston Villa 0.004 0.007 0.064 -0.204 -0.55022142 1.418894555 77
Birmingham City -0.340 0.020 0.096 0.238 -0.6189991 1.201874769 80
Blackburn Rovers -0.930 0.022 0.275 0.187 0.137555356 1.090961883 87
Bolton Wanderers -0.598 0.025 0.107 0.085 -0.6189991 1.037063675 76
Charlton Athletic -0.724 0.028 -0.156 -0.030 -0.34388839 1.092264183 81
Chelsea 0.010 0.015 -0.068 -0.048 1.237998201 1.565648982 89
Everton 0.248 0.009 -0.044 -0.138 -0.13755536 1.528012002 86
Fulham -0.663 0.019 -0.211 0.130 -0.6189991 0.57730551 79
Leeds United -0.355 -0.009 -0.155 0.207 0.550221423 1.546476465 78
Liverpool 0.121 0.003 0.080 0.042 0.756554456 1.660618117 88
Manchester City 0.050 0.012 -0.212 0.004 -0.20633303 1.405562142 84
Manchester United 1.527 -0.042 -0.910 0.211 1.650664268 2.169613539 92
Middlesbrough -0.369 0.024 -0.058 0.157 -0.13755536 1.28238209 82
Newcastle United 0.065 -0.005 -0.056 0.232 0.894109812 1.868993495 90
Southampton -0.464 0.017 -0.027 0.118 -0.48144374 1.269644036 85
Sunderland 0.012 0.016 0.117 0.145 -1.99455266 1.56318391 73
Tottenham Hotspur 0.212 0.013 -0.166 0.088 0.068777678 1.448534715 83

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West Bromwich -0.429 0.010 -0.030 0.068 -1.44433123 1.112474853 74
Albion
West Ham United -0.288 0.036 -0.071 0.027 -0.55022142 1.400210064 75
Note: the coefficients (δ 1i, δ 2i, δ 3i) are taken directly from Dobson and Goddard (2001 pp.348-349)

Appendix 5 - Derivatives

asi = γ i + δ 1ilsi + δ 2ipsi + δ 3igsi

⇒ psi = (asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i

⇒ Pi = [σ p(asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i] + µ p

Ri = Pi. Ai = Ai {[σ p(asi - γ i - δ 1ilsi - δ 3igsi ) / δ 2i ] + µ p}

= Aiσ p ((ln(Ai)-µ A)/ (σ Aδ 2i)) - Aiσ p (γ i - δ 1ilsi - δ 3igsi)/ δ 2i + Ai µ p

= Ailn(Ai) (σ p / σ Aδ 2i) - Aiµ A (σ p / σ Aδ 2i) - Ai (γ i - δ 1ilsi - δ 3igsi) (σ p / δ 2i) +

Aiµ p

∂Ri/∂Ai = 1+ln(Ai) (σ p / σ Aδ 2i) - µ A (σ p / σ Aδ 2i) - (γ i - δ 1ilsi - δ 3igsi) (σ p / δ 2i)

+µ p

= (σ p / σ Aδ 2i) (ln(Ai) - µ A + 1) - (γ i - δ 1ilsi - δ 3igsi) (σ p / δ 2i) + µ p

(*)

= (σ p / δ 2i) (asi - γ i - δ 1ilsi - δ 3igsi + 1/σ A) + µ p

substitute in δ 2i = asi - γ i - δ 1ilsi - δ 3igsi / psi

= (psiσ p / asi - γ i - δ 1ilsi - δ 3igsi) (asi - γ i - δ 1ilsi - δ 3igsi + 1/σ A) + µ p

= psiσ p + (psiσ p / asi - γ i - δ 1ilsi - δ 3igsi) (1/σ A) + µ p

= Pi - µ p + (Pi - µ p)/ σ A (asi - γ i - δ 1ilsi - δ 3igsi) + µ p

= Pi + [(Pi - µ p)/ σ A (asi - γ i - δ 1ilsi - δ 3igsi)]

67
from * above

∂ 2Ri/∂A2i = (σ p / σ Aδ 2i)(1/Ai)

= (σ p / Aiσ Aδ 2i)

= (σ p / [Aiσ A (asi - γ i - δ 1ilsi - δ 3igsi / psi)]

= (psiσ p)/ [Aiσ A (asi - γ i - δ 1ilsi - δ 3igsi )]

= (Pi - µ p)/ [Aiσ A (asi - γ i - δ 1ilsi - δ 3igsi)]

Appendix 6

The graph below shows a plot of the (order data) first derivatives of the revenue

function against the appropriate normal quantiles. Such a plot is known as a Normal

probability plot and is used to assess the appropriateness of the normal distribution.

The graph shows that, excluding the first and last observations (which could be

considered as outliers), the data form a nearly linear pattern. This suggests that a

normal distribution appears to be a good model for these data.

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Appendix 7 - Propagation of Error Method

Rice (2001) pp. 152 states, where Z is a function of two variables x and y,

E(Z) = g(µ x,µ y) + 0.5 σ 2

x (∂g(µ x,µ y)/∂x)2 + 0.5 σ 2
y (∂g(µ x,µ y)/∂y)2 + σ xy

(∂ 2g(µ x,µ y)/∂x∂y)

Var(Z) = σ 2
x (∂g(µ x,µ y)/∂X)2 + σ 2
y (∂g(µ x,µ y)/∂y)2 + 2σ xy (∂g(µ x,µ y)/∂x)

(∂g(µ x,µ y)/∂y)

Where σ 2
x is the variance of variable x, σ 2
y is the variance of variable y, and σ xy is

the covariance between variable x and y.

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Thus, for the first derivative, Z = g(P,X) = Pi + [(Pi - µ p)/ (σ A Xi)]

E(Z) = g(µ p,µ x) + 0.5 σ 2

P (∂g(µ p,µ x)/∂P)2 + 0.5 σ 2
X (∂g(µ p,µ x)/∂X)2 + σ PX

(∂ 2g(µ p,µ x)/∂P∂X)

= 19.55 + 0.5(46.87619)(0) + 0.5(1.356)(0) + (2.054)(-3.36)

= 12.65

Var(Z) = σ 2
P (∂g(µ p,µ x)/∂P)2 + σ 2
X (∂g(µ p,µ x)/∂X)2 + 2σ PX (∂g(µ p,µ x)/∂P) (∂g(µ p,µ x)/∂X)

= 46.87619(2.833)2 + (1.356)(0) + 2(2.054)(2.833)(0)

= 376.223

SD(Z) = 19.396

Similarly for second derivative, where now Z = (Pi - µ p) / (σ A Yi) with Yi = AiXi

E(Z) =0

Var(Z) = 46.87619(0.000035551)2 + 4608400372(0.000000024)2 + 2(0.000035551) (0.000000024)

= 0.000002998

SD(Z) = 0.001731511

Acknowledgements

I would like to thank Dr A. Walker and Dr. A. Seheult for their help.

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