Tag Archives: Economic Theory explained by football

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Economic Theory explained by football – Disruptive influencers


Day eight of our look back without anger at the last ten years of blog posts.  One of the most enjoyable projects I worked on was the Economic Theory explained by Football (you can read them all here) – I’ve picked one from the series that demonstrates the changing fortunes in football.

Back in 1997 DC United won the second ever MLS Cup, beating Colorado Rapids on home turf in Washington DC. Avid fan (probably) and Harvard Business School professor (definitely) Clayton Christensen was so compelled by DC United retaining their title that he sat down and and mused as to whether this could be the start of something beautiful for his side and US Soccer in general. Looking across the pond at the dominance of Manchester United plus the emergence of the Galacticos in Madrid he wondered if a new force from North America could emerge to take world football by storm. His theory on disruption theory has been called “one of the sexiest theories ever written” by The Lady magazine, high praise indeed and has since been adapted for wider economic models, but it should always be remembered that it’s humble beginnings were in the beautiful game (probably). So what’s all the fuss about?

Christensen’s theory is based around the principle that innovators with cheap solutions to a vexing market problem can unseat larger, more established rivals in the short term. So in the case of DC United’s squad, assembled at a fraction of the cost of United’s or Real’s, could their domestic dominance and momentum carry them across the pond and further in the global game? His theory was hailed as the answer to everything from making health care more efficient to reducing poverty by some of the world’s greatest thinkers, and Elton Welsby, and was the talk of the dressing and boardrooms from Rio to Rome.

Christensen wrote that disruptive innovations, such as Social Media networks, Rainbow Looms and Snoods tend to be produced by outsiders from their industry (a fact since backed up by organisations such as AirBnB, Uber and Tesla).  The business environment of market leaders does not allow them to pursue disruption when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition). So when FC United won their first MLS Cup back in 1996, nobody outside of North America took them seriously – it was after all a small domestic league of ageing imports and unproven domestic talent. But back to back wins, and two more final appearances in the next two seasons allowed them to pursue that disruption and potentially start eat the global giants breakfast.

Alas, DC United’s dominance didn’t last as long as that new fangled The Facebook although it did outlive the crazes of plastic bracelets made by our kids and neck scarves worn by hardy professional footballers. Christensen’s theory was debunked by some who pointed to Apple’s continued dominance in the device market, or Amazon’s in terms of online shopping and logistics. We’ve seen pretenders to the footballing global dominance throne very occasionally come forward but money talks in today’s game. There is no coincidence that the clubs with the deepest pockets in England, France, Holland, Spain, Germany and Italy walk away with the honours year after year. Despite salary caps, centralised contracts and no meritocracy structure, the US domestic game is no different today. In the US, DC United’s star briefly flickered again when Wayne Rooney arrived for a season and a bit, but no one team (or should I say, Franchise), has been able to dominate because of the false competitive environment in place in the MLS.

Christensen’s five minutes of fame may still resonate with some economic thinkers but in terms of the world of football it’s the same old story – money talks.

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Economic Theory explained by Football 22 – The Public Choice Theory


It’s quite probable that when James M Buchanan Jnr created is Public Choice Theory he didn’t expect to win a Nobel Prize.  But that’s what he did.  He probably also didn’t think it would be used to explain why certain players strike up natural partnerships with each other that delivers significant benefits for their club.

Buchanan was almost certainly a fan of the great Rapid Vienna side of the early Eighties who won back to back Austrian Bundesliga titles whilst he was teaching at the Austrian School of Economics.  They won the1982-83 title on goal difference from city rivals Austria Vienna thanks in no part to the goal-scoring partnership of Hans Krankl and Antonín Panenka.  Krankl was a goal-scoring legend for the club, scoring 267 goals in 350 games but he rarely found a striking partner who he worked well with.  Enter Czechoslovakian Panenka in 1981 and the rest is history and he averaged a goal every other game in his four years at the club.

So what’s a Nobel-winning Economic theory got to do with the scoring exploits of Krankl and Panenka?  Good question to ask and one that Buchanan could have taken to his grave if it wasn’t for his study, Buchanan lays out his award-winning theory in a book he co-authored with Gordon Tullock called, “The Calculus of Consent: Logical Foundations of Constitutional Democracy.”

Buchanan brought together insights from political science and economics to explain how public-sector individuals, such as politicians and civil servants make decisions. He showed that, contrary to the conventional wisdom that the public-sector acts in the public’s best interest, unless there is a clear win-win situation.  In footballing terms, players, especially strikers, are inherently selfish, wanting all the glory for themselves.

However, once in a while a club will stumble of a partnership where both players work in unison, understanding that the sum of the two talents is greater than their individual efforts and thus debunking Buchanan’s work.  Shearer and Sutton, Sheringham and Cole, Cottee and McAvennie and now Smith and Okoh for the mighty Rooks have proved that mutual interest is stronger than self-interest.

Since our dynamic duo were paired together against Sittingbourne, they’ve scored six between them, of which five have been laid on by each other.  Last weekend’s opening goal against Godalming Town was a classic example with Jonté Smith holding the ball up and drawing defenders to him before playing Stephen into space behind the defence to slot home.  For us Rooks fans the partnership is getting better game by game although would have had Buchanan tutting into his Apple Strudl.  He would have enjoyed Okoh’s solo effort in Guernsey though where he appeared to take on the whole Guernsey side without a care in the world for the Rooks players (including Jonté himself) in support before curling it home.

So next time you see a player decide he’s going go it alone and ignore his team mates in better positions rest assured it’s not through self-interest but rather conforming to a Nobel-prize winning theory.

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Economic Theory explained by Football 21 – The Kaldor-Hicks Theorem


It doesn’t matter what the decision is, someone somewhere will be worse off.  It doesn’t matter if it’s a political decision, an economic decision or a referee’s decision, there will be winners and losers.  In theory there could be a decision made that benefits everyone and penalises nobody, called the Pareto Improvement, but that’s hardly like to happen – everyone could be given free entry to football if the clubs were compensated but somewhere along the line someone will have to pay, for instance by increasing the subscription fees to watch games on TV, or a decision to lower the cost of a replica shirt will impact margins somewhere and cause pain to a manufacturer or the work force employed to make it.

I’ve no idea if Nicholas Kaldor and John Hicks were football fans or even if they were thinking about the beautiful game when came up with a theory that determined for every decision that was seen as positive in some people’s eyes, there would be a group of people who would be made worse off in some way (economical or socially) but their criteria to determine whether a decision is as holistically beneficial can be applied to virtually every decision we, or any club makes.

For instance, in the summer we made the decision to reduce our admission prices by £1 for Adults and Concessions.  Everyone benefited right?  The fans had an extra £1 in their pockets which they could potentially spend elsewhere in the club for sure but the club loses out.  We are pretty sure that it isn’t price that impacts our attendances rather than whether Brighton & Hove Albion are at home, and most importantly how we are playing.

If we continue to play as we are then we could probably increase admission back to £11 and £6 and there will be no material impact on the crowd.  Our fans want to see winning football and our pricing strategy does not inhibit attendances.  Last season we averaged 413 at this stage of the season, this season 409.  So we’ve dropped down a division and reduced prices by £1 but no more fans are coming through the gate.  BUT if we look at our attendances since our mid-September turnaround happened and we started playing better, we are actually averaging 440, nearly 10% up on last year.

The obvious loser in the decision to reduce admission charges is the club.  Our costs have either increased or at best stayed the same.  Our playing budget is still £2k per week.   We play 23 home league games in the season, which works out at £3,200 in costs per home game.  If our average attendance falls, as it has so far, despite admission being reduced then we have a hole to fill.  Taking the facts as red and assuming we have 300 paying fans each home game, we are £300 down per game or almost £7k down on the season.  We could try and sell 152 additional programmes per game to make up the deficit or simply suck it up (which we’ve done).

I remember seeing one side a few years ago try to introduce a variable pricing strategy based on league position with four check points in the season.  So they set the pricing at the start of the season, then reviewed after circa 10, 20 and 30 games.  The concept was that the better the team were doing, the lower the admission was.

However, this is economically wrong.  Let me demonstrate:-

If the average admission paid per spectator at the start of the season is £10 and the average attendance is 1,000 then match day ticket revenue is £10,000.

After 10 games the club are having a shocker and fall to the bottom of the league.  The club can’t justify changing admission prices despite average attendances dropping to 900, thus match day ticket revenue is £9,000.

After 20 games they’ve changed their manager and have improved, sitting just outside the playoffs.  The club drops ticket prices by 10%.  Average attendances rise back to 1,000.  Match day ticket revenue is still £9,000 (£9 x 1,000)

After 30 games they are challenging for the title and the club drops pricing down for the final home games to £8 to bring the fans in.  Attendances go up to 1,200 so match day revenue is now £9,600, which is less that they were getting when they were bottom of the league. The total season revenue for 40 games is £376,000.

Of course the more fans attend games, the more they will spend in the ground but even so, the theory above shows that it is flawed.

If instead the club would have reversed their strategy, it would have looked like this:-

Game 1 – £10 admission, 1,000 average attendance = £10,000 match day revenue

Game 11 – £8 admission as they are bottom of the leave, 900 average attendance = £7,200 revenue

Game 21 – £10 admission, 900 average admission = £9,000 match day revenue

Game 31 – £12 admission, 1,200 average admission = £14,400 match day revenue

Total match day revenue is £406,000 or 8% more than the strategy most clubs would employ.

According to Kaldor and Hicks, whilst the economic rationale behind a decision to lower pricing when the team was doing well was sound, it actually makes no economic sense.

The decision by the Premier League and the member clubs to cap ticket prices at £30 for away fans is another example of the Kaldor-Hicks Theorem in practice.  Whilst the decision will benefit the travelling fans, the clubs themselves will see a reduction in revenues unless they raise ticket prices for home fans.  Hopefully, the huge sums of money the clubs now receive from the new TV deal will more than compensate them – in fact they could still afford to reduce pricing comparably for home and away fans, although let’s face it, that’s hardly likely to happen is it?

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Economic Theory explained by Football 20 – The Paradox of Choice


In 2004 American psychologist and Philadelphia Union fan Barry Schwartz published his book called The Paradox of Choice – Why More is Less where he argued that eliminating consumer choices was actually a good thing as it greatly reduced anxiety for consumers.

“Autonomy and Freedom of choice are critical to our well-being, and choice is critical to freedom and autonomy. Nonetheless, consumers today have more choice than any group of people ever has before, and thus, presumably, more freedom and autonomy, we don’t seem to be benefiting from it psychologically.“  Barry argued.  Whilst his text made references to consumers throughout the book, it is clear that deep down he was actually basing his research on the spiralling transfer market.

Schwartz espoused the concept of voluntary simplicity, where we only have a small number of choices in life and immediately you can see he is referring to the majority of Non-League football clubs, who simply do not have the resources to be able to pick and choose the players they want.  We often refer to this as Hobson’s Choice, named after the Oxford United Chairman who found himself with no candidates when he advertised for the manager’s role a few year’s ago.

The concept of the Transfer Window in the world-wide professional game was supposed to reduce the stress and burden on clubs but all that it has done is concentrate the wheeler-dealings into two small windows.  Clubs struggling in the first half of the season put all of their hopes in the January Transfer Window but are often frustrated by rising prices because the selling clubs know they are desperate based on their league position.  The Paradox of Choice is seen in full effect where there are often far too many options but too few genuine choices.  Unless a club is prepared they simply will not be able to see the wood for the trees.

Schwartz’ research found that when people are faced with having to choose one option, or player out of many desirable options, they will naturally consider the trade-offs mentally before making their decision and they will think in terms of the value of the missed opportunities rather than the value the potential choice will bring.

Every week Darren has to make a choice between putting a substitute keeper on the bench or an outfield player.  It has been over a year since we have needed to use a sub keeper, although those who saw the game at Canvey Island last year would have prayed we had on that day and it is therefore a fair decision to put five outfield players on the bench each week.  If we only had a squad of 16 players then he wouldn’t have to make that difficult decision – it’s not like he has to play everyone on the bench.  So perhaps the Paradox of Choice would make his job a little less stressful come match day.

Schwarz’s theory has been debunked by a number of further studies, suggesting the complete opposite, that more choices make people happier.  But if you knew the back story about his research you’d understand it was all about football anyway.