Economic Theory explained by Football – Part 10 – The Theory of Just Pricing


Back in 1261 whilst waiting for the medieval equivalent of Super Sunday to start Thomas Aquinas picked up his quill and started to draft the first ever transfer policy for his as-yet unnamed football team. He had studied the way that his local market worked and mused that “no man should sell a thing to another man for more than it’s worth”. In that one statement he tried to explain the collective transfer value of Andy Carroll.

4766163428_f4f73b243f_bAccording to prevailing economic theory, there is no such thing as a rip-off or something being over-priced. The price of anything is simply the market – if someone is prepared to pay then it is a fair, market price AS LONG AS there are alternatives (monopolies such as train companies do not adhere to such a model of course). So if someone wants to pay £25million for a route-one target man with a dodgy knee and an even dodgier ponytail then it is a fair price. Nobody forces a football club to buy any player – they have three choices. Try to negotiate a lower price perhaps throwing in a few players who aren’t good enough for them, spend the cash on something else such as a new fleet of Bentleys for the existing player or go and buy an alternatively crocked player with a bad haircut elsewhere.

The transfer market should establish a fair price for every player as no one has an intrinsic value. So they may have played for their country a hundred times, scored the winner in a World Cup Final, kick with both feet and can head the ball fifty yards – all great characteristics but irrelevant if you are looking for a goalkeeper. Clubs who slap a price tag on a player are trying to create a false economy that will never prevail.

Aquinas suggested the concept of a “just price” – the price the buyer is willing to pay with the right amount of knowledge of the product. So if a club knows Carroll has a dodgy knee/ankle/ponytail, the price they are willing to pay should be different to that without the information. He also saw those people who sold with recognised avarice as evil people – something that could certainly be levelled at the ticket pricing strategy of football today, or dare I say it, football agents.

So there we have a brief explanation as to how a 13th century Italian monk came up with the first, truly fair rules of the transfer market. That ladies and gentlemen, is the theory of just pricing.

Economic Theory explained by Football – Part 9 – The Theory of Collective Insanity


In 1841 the Scottish journalist and future Alloa Athletic fan Charles Mackay published his most famous work – an essay that today is the piece of work that every Premier League club religiously reads each summer when talk turns of ticket pricing. The Extraordinary Popular Delusions and the Madness of Crowds focused on the herd-mentality of people and how it influenced prices.

8829793588_0aced7c6b7_kMackay’s hypothesis was that crowds acting in a collective frenzy of speculation can cause the prices of commodities to rise far beyond any intrinsic value they should have. He looked at the examples of the South Sea Bubble of 1720 as a classic example of how this theory worked. If Charlie was alive today, he could well just pick a Premier a League football club as a modern example.

His 8 step model to document the steps to how crowds breed collective insanity is as follows. Whilst in this example we use ticket price, the transfer market is an equally valid case study:-

1. Extraordinary conditions occur in the footballing world such as a team getting promoted to the land of milk and honey, or in the case of some also ran sides (Swansea City, Stoke City, Hull City, Spurs) they win a trophy or get into European competition.

2. Success means ticket prices rise in tactical ways – match day walk up tickets for instance.

3. News of price rises is published to great dismay among supporters

4. Mass discussion on forums/social media normally leads to comments like “well you don’t have to go”.

5. Other clubs notice. They put their prices up too, thinking that despite not having any success, that it’s the trend in football, blaming agents fees or lack of TV money.

6. Crowds breed collective insanity – the tipping point is reached

7. Football eats itself, the club gets knocked out of Europe in 1st round because the manager fields a weakened team to concentrate on the Premier League. Results are poor, manager is sacked and club goes into free-fall.

8. Attendances fall, club realises they need to drop ticket prices.

Earlier in the season, the BBC published its study of the cost of watching football in this country.  Essentially, the research was a pile of rubbish.  Instead of going to do the research themselves (type in club website into browser, find page that says “tickets”, note down prices) then sent a survey to each club.  So when West Ham responded and said their cheapest ticket for a Premier League game was £20, people thought “wow, that’s good value”.  However, that priced ticket was only available for 1 game this season, the pre-Christmas match versus Leicester.  It wasn’t the averaged priced one, which is over DOUBLE that.  Ticket prices continue to outstrip inflation simply because of the theory above.

So there you go – the Theory of collective insanity in a nutshell. Next time your club puts its prices up blaming players wages you’ll know it’s really that pesky Alloa Athletic fan, Charles Mackay, to blame.

Economic Theory explained by Football – Part 8 – The Theory of Value


In the eighth of the Football-themed Economic articles, one of the world’s greatest mysteries is unravelled – The Theory of Value.

Former Morecambe, Stockport County and Grimsby Town striker Phil Jevons may not appear to be much of a deep thinker but the Jevons family are famous for defining one of the more interesting economic theories – that of utility and satisfaction.  His distance ancestor, William Jevons was a bit of a brain box, creating a piano that played itself based on logic and an early computer that could analyse the truthfulness of an argument.  Forward thinking indeed for the late 19th century.

Jevon’s theory was simple.  Too much football makes you bored.  Remember when live football on TV was restricted to the odd Home International and the FA Cup Final.  Match of the Day and The Big Match gave us a couple of highlights every weekend and that was it.  And we lapped it up.  Cup Final day was an eight hour footballing extravaganza that the whole family watched.

8710863386_841af277e1_bWhen England played Norway in a pointless early season friendly in September the official attendance was 40,181.  Official means that the FA included all those lucky people who bought Club Wembley seats some time ago…bought yes, attended the game? Maybe not, so the attendance was probably significantly lower than this.  Yes, but what about those watching on ITV I hear you say?  4.5 million people switched on at some point during the game – nearly half of that who enjoyed the delights of The Great British Bake Off on BBC at the same time.  Why?  Well, perhaps because of the theory that Jevons articulated.

Jevons said that the more that we consume of a product, the smaller the increase in satisfaction we receive from it.  With that statement he created the law of diminishing marginal utility.  Whilst we all want our team to be winning week after week, we would actually gain less and less enjoyment from each win.  Interestingly enough, according to Jevons, demand for the product should actually decrease and that will in turn reduce the price.  Think of going out after the game and having a few beers.  At some point they stop being enjoyable and actually start doing you harm as the hangover kicks in.

In footballing terms we can see both sides of the coin.  Teams who win week after week are actually more in demand.  Crowds go up, fan satisfaction increases and in the true economic sense, a club could actually charge more for the product and the fans would continue to a point where the price for “satisfaction” becomes unsustainable.  But if we start to lose, then we get less and less enjoyment out of each game and eventually even the most ardent fan gives up.  The moral here according to Jevons, spurned another famous saying – “You win some, you lose some” – that’s what keeps us football fans interested.

And that, ladies and gentlemen, is The Theory of Value in a nutshell.

Economic Theory explained by Football – Part 7 – The Veblen Effect


In the seventh of his deep-thinking articles, our in house Economist Stuart Fuller demonstrates why lowering ticket prices is a bad thing.

Hands up who wants a Rolls-Royce?  Ok, apart from Cynical Dave and Deaks who can’t drive.  We would all love to own one, right?  But it is just a dream for when we win the lottery, or England enjoys Sahara-like conditions and the solar panels on the roof of the Main Stand pay us a fortune.  But what if they reduced the price by 90%?  Would you still want one then if every Tom, Dick and Deaks could afford one?  Second thoughts eh?  That is the Veblen effect for you.

15791879632_0be24a2e8b_kThorstein Veblen* came up with this theory back in 1899.  Sheffield United had just won the FA Cup and paraded the trophy at Bramall Lane.  Veblen was unhappy that only a few thousand fans were in the ground, singing a version of Annie’s Song that was so cruelly credited to John Denver nearly eighty years later.  He hated the fact that it was an “Exclusive” club, with ticket prices kept high to keep out the riff-raff.  “Let them eat Eccles Cake” he famously said, referring them to becoming Sheffield Wednesday fans.

Veblen’s theory was relatively simple.  He noted that some types of luxury goods, such as high-end wines, designer handbags, luxury cars and tickets to see United were prestige items, or as he liked to call them, Veblen goods.  He noted that in decreasing their prices, people’s preference for buying them also diminished because they are no longer perceived as exclusive or high-status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the goods even more preferable.  So he argued that Sheffield United should actually increase their ticket prices to drive up attendances.

Even a Veblen good is subject to the dictum that demand moves conversely to price, although the response of demand to price is not consistent at all points on the demand curve meaning that it is not simply good enough for a football club to slash its prices as people will not see any value at all in what is now on offer (See our previous article on Pay What You Want Theory).

It seems someone in the Premier League found Veblen’s original work in a drawer when moving desks at Premier League HQ a few years ago and passed the idea across to the Premier league clubs who immediate put their ticket prices up thinking the fans will flock through the gates.  They were wrong, Veblen was wrong and yes, we all want a Rolls-Royce for the price of a Lada.

And that, ladies and gentlemen, is Veblen Theory in a nutshell.

*Whilst Veblen came up with the theory, it is unclear whether he really was a Sheffield United fan.

Economic Theory explained by Football – Part 5 – The fake deal in football shirts


In 2012, the major professional sports leagues in the United States lost over $13 Billion in revenue due to sales of counterfeit shirts and merchandise including a whopping $3 Billion alone from the 32 teams in the National Football League (NFL).  Some top end “authentic elite” team shirts which should retail for $250 could be found online with an 80% discount*.   These numbers, whilst staggering on their own, are just a drop in the ocean when we look at the total “black” economy which runs annually into trillions of dollars.

8835116252_85b97df617_kIn Europe, football means something very different to the American version.  Whilst the biggest NFL sides can expect to sell tens of thousands of shirts (neither official shirt supplier Nike or the NFL will actually reveal unit sales), the unit sales for the best selling “franchise”, 2014 Super Bowl champions Seattle Seahawks pales into insignificance to current European Champions League winners Real Madrid who sell over 1.4 million shirt sales per annum, the vast majority now bearing the names of twin superstars Ronaldo and our very own Gareth Bale.  Hot on their heels is Manchester United and Barcelona, each selling over a million shirts per annum. The top ten football clubs sell over 7.5 million shirts per annum across the globe, significantly more than the top ten clubs of any other sport.

Obviously these numbers only reflect the official sales.  Browsing the new adidas store at Bluewater last week I picked up a Real Madrid shirt, complete with an official Champions League badge on the sleeve. The prices tag? £60. Last month Nike and the Football Association found themselves being the talk of the town for the wrong reasons with questions even being raised in the Houses of Parliament over the price of the New England shirt, with those “authentic elite” versions again costing upwards of £90.

Football shirts are not luxury items, yet their official price tag puts them in the same category as similar types of items sold by the likes of Armani, Gucci and Versace.  £60 for what essentially is a t-shirt is simply crazy, irrespective of the new-fangled material used to differentiate the latest version from the almost identical one released the previous year.  They are a lifestyle purchase. Whilst a very small numbers of sales will be based on fashion sense, the vast majority are based on the blind loyalty that football fans have for their team.

In the last few years manufacturers and clubs alike have come under criticism for the number of new kits they bring out.  Whilst nobody is forced to buy the new, upgraded version of the shirt when it is released, that same blind loyalty has has queuing up to buy the shirt on the first day of sale.

It is the rule rather than the exception that clubs bring out a new football shirt every year.  Not just one shirt, but in some instances six different versions if you count the special “European campaign” and goal keeper ones. Chelsea, for instance, have released fourteen different kits, excluding their goalkeepers one, in just five seasons.

With the retail cost increasing every year it is no wonder that the market for counterfeit goods is swelling every year. Just last month a huge haul of fake football shirts was discovered on its way into the United States. More than $1 million worth of Chelsea, Barcelona and other major European football teams shirts were found in a container at Savannah Port in Georgia that had arrived from China.  The US Customs and Border Protection force will readily admit they got lucky in finding the counterfeit items in Georgia – hundreds of millions more pass under their noses every year without detection.

The majority of counterfeit football shirts are made in Asia where raw materials and workers wages are very low.  Over the course of the last few years I’ve been to the Grand Bazaar in Istanbul, the Night Market in Marrakech, the Ladies Market in Hong Kong and even the Sunday Boot Fairs of Sidcup.  Vast ranges of every major football shirt can be bought for just a few pounds.  The quality of the counterfeits varies per seller, with some offering “special edition” shirts.  When I was in. Morocco two years ago, one stall was selling Manchester United, 2012 Premier League Champions shirts, made specifically for the Reds title success.  The problem? Rivals Manchester City won the title with virtually the last kick of the season.

It is fairly obvious that you aren’t buying the real thing at the price they are being sold for, although production techniques now mean that fakes come in a variety of grades of quality.  At the low end the wrong material and non-exact match colours will be used and often there will be spelling mistakes (Liecester City anyone?) whilst the higher grade ones will often have all the bells and whistles of the real thing including holograms and inside printing.

But there is another side to counterfeit football shirts that you may not have considered and that is the conundrum of brand awareness.

Consider this situation.  Every counterfeit shirt carries the branding of not only the football club, but also their main commercial partner(s).  The whole reason why major brands invest millions into putting their logo on the front of a football shirt is to increase their brand awareness both in existing and new markets.  The hundreds of millions invested by Emirates into their sponsorship of Arsenal, Olympiakos, Paris Saint-Germain, Hamburger SV, AC Milan and now the European Champions, Real Madrid means they have huge global exposure from the sales of official shirts.  But their logo also appears on counterfeit items as well, increasing their global reach albeit through illegitimate channels.

Consumers simply associate Emirates with these shirts, irrespective of the legitimacy of the shirt.  Whilst the airline may be deeply unhappy that their logo is being used on counterfeit items, they are essentially increasing their return on investment through free advertising. I have no doubt that the sales of fake shirts are taken into commercial consideration when they are negotiating their deals, but it is a by-product that they inadvertently benefit from.

And what of the clubs themselves? Football is now a global game.  The elite clubs no longer consider the summer break as a chance to rest and relax.  They now travel far afield to play exhibition games in front of sell-out crowds in new markets.  The forthcoming Guinness International Champions Cup in the USA is an example of this where some of the world’s biggest clubs including three of Emirates sponsored teams, Olympiakos, AC Milan and Real Madrid will play a series of games around the USA to boost interest in the game.  Last year Chelsea travelled to Singapore and Malaysia, whilst Manchester United played in Hong Kong as part of their strategy of increasing their global fanbase.

Many of these fans, in the Far East especially, have significantly less disposal income than their core fans have in England.  They cannot afford the real-deal, climacool, multi-weave new shirt at £60. But they can afford the counterfeit at £5.

By buying a counterfeit shirt, one that they can afford, they are still buying into the brand, happy to market the club by wearing the badge, albeit one that may not be official. Does this make them less of a fan?  By spending 90% less on a shirt they can then afford to buy a ticket or subscribe to the club’s online streaming content.  What is more important to the club? New fans who will engage with the club on a regular basis or ones who will contribute a small amount of money once a season through an official shirt purchase.

The whole sports apparel and merchandise market is unique.  Someone who buys a counterfeit Gucci shirt or a fake IPhone charger is doing so for very different reasons than someone who buys a fake replica Barcelona shirt.  Whilst football clubs need to have a brand protection strategy in place, are counterfeit shirts the maker concern for global sporting brands? It’s an interesting debate, one that will certainly differ whether you have the emotional engagement as a fan or the commercial view as a sponsor or the club itself.

*Source:  Allan Brettman, “NFL, Nike fight to keep counterfeit products off the market,” Orgonian, November 16, 2013.