Sports and Economics: A sneak peek into the NBA

Written by: Tommy Xie Edited by: Timothy Wong

The National Basketball Association (NBA) is the 4th largest sports league, and the single largest basketball league in the world. With over $10 billion USD revenue in 2022, it has attracted countless sponsors, audience groups, and renowned basketball players. But, how? This report will dive into the economics behind Adam Silver’s meticulous operations that has made the NBA so successful. 

Market Structure — Monopoly or Oligopoly?

While there are 30 teams in the NBA, this market is still similar to a monopoly. Spare a few states (e.g. California, Texas, New York) that have multiple NBA teams, most states only have one team per state. This nurtures a monopoly within the state, where there are no close substitutes to an NBA game, granting teams monopoly power. With that, franchises can influence ticket prices based on demand elasticity, where high-profile games can command premium prices. For example, two courtside seats that would’ve cost $2000USD for a normal game ramped up to $27,500USD on Kobe Bryant’s last game. Through a lack of substitutes, each NBA is able to have monopoly power within its state, leading to an increase in revenues.

Capturing Consumer Surplus — Second-Degree Price Discrimination

NBA teams often implement tiered pricing strategies for tickets, offering varying prices based on seating location and game importance. For example, courtside seats are priced significantly higher than upper-level seats; a courtside ticket often exceeds $500, while upper-level seats might be priced at $30-$100. By offering different ticket prices based on location, each NBA team successfully captures more consumer surplus per individual. And where does that captured consumer surplus go? It ends up being a supernormal profit. 

What makes the NBA more interesting than the EuroLeague?

There are multiple factors that contribute to the success of the NBA, including player talent, the attractiveness of the US market overall, and much more. However, in terms of management, perhaps the most important factor is the NBA Draft and the Salary Cap. In sports economics, this is known as the competitive balance. 

• Salary Cap: The NBA operates under a salary cap system, which limits the total amount teams can spend on player salaries. This ensures that wealthier teams cannot simply outspend others to acquire top talent.

• Draft System: The NBA draft is designed to allocate new talent to the weakest teams first, helping to level the playing field. The lottery system gives poorer-performing teams a higher chance of securing top draft picks.

The EuroLeague, however, does not have a salary cap. This allows wealthy clubs to assemble star-studded rosters, creating a huge disparity of skill level between clubs, resulting in a boring game. 

Competitive balance is key to making the game remain interesting, competitive, and enjoyable. Afterall, a rivalry between LeBron James and Stephen Curry is undoubtedly more entertaining than watching Real Madrid destroy everyone in the EuroLeague. 

Conclusion

Through careful economic considerations, Adam Silver has successfully transformed the NBA into a commercial league that isn’t just about basketball. Behind every successful industry leader, there ought to be meticulous operations that differentiates them from other competitors. Economics exists everywhere.

Works Cited:

iSportIndia (2024). Top 10 Richest Sports League in the World 2024 - isportindia - Medium. [online] Medium. Available at: https://medium.com/@Isportindia/top-10-richest-sports-league-in-the-world-2024-18d1c9730152 [Accessed 27 Oct. 2024].

1keydata.com. (2024). NBA Teams By State. [online] Available at: https://state.1keydata.com/nba-teams-by-state.php [Accessed 27 Oct. 2024].

‌News, A. (2016). The Stunning Prices People Are Paying to Watch Kobe Bryant’s Last LA Lakers Game. [online] ABC News. Available at: https://abcnews.go.com/Business/kobe-bryants-game-ticket-prices-soar/story?id=38361396 [Accessed 27 Oct. 2024].