Monday, October 20, 2014

Why Definitions Matter, Part 2: Demand or Quantity Demanded?

Here is my second installment on economic/business descriptive definitions and why they matter.  The first was on "bubbles".  Arguing for that distinction earned me the "pedantic" accusation on twitter from @patrick_hruby but he is just wrong, both in context and in label-slinging.  These types of distinctions are critical to communication; without them, we must always begin a conversation with, "What do you mean by that?"  And that seems inefficient and potentially quite confusing for no real reason.

Demand or Quantity Demanded?

This is an old favorite of economics professors and, judging from treatment in the press, always will be.  Just look at the two carefully:  "Demand" versus "Quantity Demanded".  They do not look the same and for good reason:  They do not mean the same thing!

Let's think about "demand" and "quantity demanded" in terms of what might be a current problem for college sports ADs, the recent decline in student attendance at football games.

If attendance falls off due to bad scheduling or ever-more-enticing TV viewing, that's a decrease in Demand.  The language is reserved for a change in attendance even at the same price, where it follows that attendance has changed at all prices that could be charged.  Responses to this type of decrease are aimed at changing Demand back to its previous levels:  If an AD brings in more air shows, flying rocket man for the pre-game, more blaring video boards, more extravagant half-time programs, or alters a non-market imposition on rights to student tickets, that is an attempt to change the product so that attendance will rebound even at the same price.  Again, if fans respond, that would be an increase in Demand.

[My friend and colleague Stef Szymanski recently turns this distinction to extremely good use by pointing out that rising EPL ticket prices will not drive fans away...when they are rising because fan demand is increasing in the first place!]

On the other hand, an increase in Quantity Demanded would follow a ticket price reduction to bring fans back, more people will come through the gate (it may take a dramatic drop as this type of consumption goes, but return they will).  The language is reserved for only the response of ticket holders to a change in the price of their ticket.  As price falls, more tickets are purchased.

The distinction is important because confusing the two descriptive definitions leads to less clear assessment of AD choices.  For example, different ideas about what to do in the case of a decrease in demand are made to appear in conflict when they are not.  One group might argue, "Lower ticket prices"; another might argue "Make the fan experience better".  Both will get more people through the gate, but with different consequences.

The Quantity Demanded for college football attendance appears quite unresponsive to price.  In such a situation, reducing price will lead to an increase in Quantity Demanded of tickets, but will also decrease revenue.  Enhancing the fan experience will require increased spending, but at the same time will increase revenue (if successful), that is, attendance will increase even at the same ticket price, an increase in Demand.

Again, to the press and casual fellow travelers, please do everybody a favor and keep this straight.  The difference between Demand and Quantity Demanded matters for judging AD choices.

Saturday, October 4, 2014

Just What Do You Mean by "Bubble"?

I'm watching and reading and there is something a bit disturbing going on out there.  The language governing some economic/business outcomes in sports is being obfuscated.  Every sports price increase is a "bubble"; to fix college sports attendance demand woes, just lower price; dynamic and variable pricing are the same thing.  I can't tell whether this is just out of ignorance of well-known descriptive definitions or just sloppy use of these well-known descriptive definitions.  Maybe it is ion purpose in order to lend an added sense of urgency or judgement of the participants--people fall for bubbles, after all.  But I am concerned because the sports business can be confusing enough without this obfuscation.

Here is the first of three examples using my understanding of descriptive definitions (that match various authorities on the web).  The other two, and concluding remarks, are in subsequent entries.

Bubbles or Rising Asset Value?

A "bubble" originally described trading in an asset at higher volumes and/or price than was consistent with the ability of the asset to generate profits over time.  Eventually, a true bubble "bursts", that is, the asset's trading and price must eventually return to plausible and consistent levels based on the future return that the asset actually can generate.  In that sense, in a bubble, something is "wrong" with the asset price relative to its actual revealed value in the future.

Over time, at the level of a market or an entire economy, a bubble has also come to mean an economic cycle characterized by rapid expansion followed by a contraction.  Note especially the contraction part.

So, for a bubble, somewhere must be exaggerated expectations about the future growth of the asset value and those expectations must eventually be proven incorrect by a correction.  Now, expectations could just have been uninformed but they might also have been manipulated.

Thus, bubble logic makes us suspicious as we watch the price of the asset rise.  Pundits and market watchers may sound alarms that a bubble might be in progress.  But the seemingly unsupportable increase in price may actually be the revelation of a prolonged increase in fundamental value.  That is, the revelation that the value of some asset actually is increasing at a surprising rate.

So, a surprising increase in asset value might be a bubble, but not all increases in asset values are bubbles.  A bubble is not just a rise in the price of something.

The first bubble logic I saw misapplied was when MLB player salaries began rising at a surprising rate in the early 1990s.  "When will this crazy bubble burst?"  My response was that there was no bubble, it was just expanding cable network coverage and increasing venue revenues driving the rise in salaries.  In other words, it was easy to see salaries tied to an increase in the fundamental that creates that value in the first place--fan spending in the stadium and upward pressure on rights fees due to expanded cable coverage.

Lately, it's bubbles in franchise values and TV rights fees (again) despite the many historical instances where sports asset values have increased based on an entirely believable increase in an underlying fundamental.  [As far as I know, MLB player salaries have yet to decline.]  So, just saying some sports price rising over time is a bubble doesn't make it so.  And instilling in readers that any sports values that are rising over time all are bubbles, as if everybody paying higher prices is crazy, may make for good press but it is poor factual reporting.

So, to the press, please do everybody a favor and just note that prices of some sports properties are increasing for an interestingly long period of time (if that is even true) and then either 1) claim that bubbles sometimes, but not always, look like this so be alert, or 2) go ask somebody in the know to define a bubble and comment on whether or not the price in question is a bubble or not, and why.  And if you think the people involved with any asset are behaving in a crazy fashion, just say so; it doesn't take bubble logic to make that case.

Don't just state that an increasing price is a bubble and then have it go into the press-repetition process that imprints a potentially harmful false truth in the minds of readers.  Bubbles do suggest that participants have gotten carried away with themselves and some are bound to lose possibly large amounts.  But sometimes the value of sports assets just rise over time.