I normally like David Letterman, or at least find him preferable to the execrable Jay Leno, but he annoyed me the other night. He gave a guest a hard time based on a basic misunderstanding of microeconomics.
The guest was a sports agent, and after a few minutes of light conversation Dave started lecturing about rising ticket costs, implying that higher player salaries were at least part of the cause. The audience of course joined in, cheering Dave and jeering the agent.
The simple fact of the matter is that player salaries
do not add one red cent to the price of a ticket. If you believe they do, then you haven't taken Econ 101 or haven't thought it through, or both.
Player salaries are what is known as a "fixed" costs. Fixed, that is, relative to the amount of product (tickets) sold. Salary costs are the same whether a team sells 2000 tickets during the season or 2,000,000. In fact virtually all the costs of running a sports team are fixed in this way. This is in contrast to a manufacturing business, for example. If GM sells more cars it must buy more steel. Steel is not a fixed cost.
Sports teams, like every other business, seek a profit-maximizing price and output level. In other words, they have a choice between selling a lot of tickets at a low price, or fewer tickets at a high price. The price they choose to set is the one that they believe will result in maximum profit. If you think they operate on any other basis, I have an excellent investment opportunity in a lovely bridge over the East River I'd like to talk to you about.
Now back to Econ 101. It is a simple fact that fixed costs
have no effect on the profit-maximizing price. Since essentially all costs associated with running a sports franchise are fixed, you can view maximizing profit as maximizing the gate (ie ticket price times number sold). If the gate is maximized at $30 a ticket, then it's maximized at $30 a ticket. What you're paying your players doesn't enter into it. If you pay very little you'll make lots of money. If you pay a lot you may lose money. But whatever you pay your players you'll make the most (or lose the least) at $30 a ticket.
The truth of the matter is that ticket prices rise because,
and only because, people are willing to pay it. Higher ticket prices as well as TV revenue line the owners' pockets, creating a situation where more dollars are chasing the same number of players. In other words, higher ticket prices result in higher salaries, not the other way around. The idea that higher salaries cause higher ticket prices is a fallacy that any freshman economics student should be able to spot.