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Endogeneity in Attendance Demand Models

May 2012
Working Paper
11-013
By  Roger Noll
One of the most studied issues in the economics of sports is the nature of the demand for attendance at sporting events. With few exceptions, the standard result is that the coefficient on price in the attendance demand equation is either positive or, if negative, so small that at current prices demand is inelastic. Economists have then moved on to offering a variety of explanations for why this result may be valid, despite its inconsistency with theoretical explanations. This paper argues that the cause of price coefficients that are insufficiently negative is a specification error: the failure properly to identify the price equation in the supply and demand system. The main conclusion is that because all teams in a given sport face essentially the same marginal cost of attendance, the only circumstance in which price can be identified is one in which all or nearly all games are sellouts and teams play in stadiums of widely varying capacities. Because this condition is rarely satisfied, the best available econometric procedure is to impose a restriction on the price coefficient to the effect that the elasticity of demand is one minus the share of net revenues that are generated by in-stadium sources other than ticket sales (i.e., parking, concessions, advertising, programs).