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Inelastic sports pricing and risk

Per Andersen and Martin Nielsen

Economics Letters, 2013, vol. 118, issue 2, 262-264

Abstract: The empirical sports economics literature finds that, seemingly inconsistent with rational behavior, sports teams price in the inelastic part of the demand curve. This paper shows that this pricing strategy may in fact be consistent with the rational behavior of a risk averse sports team. To show that, we develop a static model where a risk averse sports team faces a stochastic demand and maximizes its expected utility of profits. The result of the model is pricing in the inelastic range of the demand curve. Furthermore, using comparative statics we show that increased fixed costs lower the price charged by the sports team.

Keywords: Inelastic pricing; Risk aversion; Sports pricing (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:ecolet:v:118:y:2013:i:2:p:262-264