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I.
Introduction
A standard result of firm theory states that a monopoly maximizes profit at a point along the elastic portion of its demand curve. This result can be explained intuitively: if the monopolist faces positive marginal cost, then it must stop raising price at a point where marginal revenue is still positive (and no less than marginal cost). However, empirical studies of sports ticket pricing generally find that sports (home) teams invariably price along the inelastic portion of their respective demand curves. In some cases, teams are found to price at very inelastic points. Krautmann and Berri (2007) provide a survey of 11 empirical findings of estimated price elasticities of demand for sporting events (Demmert, 1973; Noll, 1974; Siegfried and Eisenberg, 1980; Bird, 1982; Scully, 1989; Coffin, 1996; Fort and Quirk, 1996; Depken, 2001; García and Rodríguez, 2002; Hadley and Poitras, 2002; Winfree et al. , 2004). The estimates, collectively representing five different sports leagues, range in value from highly inelastic (-0.06) to marginally inelastic (-0.93). A number of authors have provided plausible theories to explain these results. Fort (2004) shows that local TV revenue relationships between teams can explain inelastic pricing in Major League Baseball. Krautmann and Berri (2007) find that sports teams may price tickets in the inelastic portion of demand to sell more concessions. Kesenne (1996, 2000) shows that inelastic pricing may result from teams maximizing wins (subject to a profit constraint) rather than profits directly. Andersen and Nielsen (2013) show that inelastic pricing may result from team risk aversion under uncertainty.
These explanations are compelling and potentially complementary. However, it appears that at least one important factor remains unconsidered. For a given game, a profit-maximizing team considers not only direct marginal revenue and direct marginal cost when setting a ticket price but also deferred, strategic benefit (revenue) from present game success. It is established that a given win is valued in the sense that it generates additional future revenue for a team (see, e.g. Scully, 1974; Fort and Quirk, 1995; Vrooman, 1995; Krautmann, 1999; Szymanski, 2004; Szymanski and Kesenne, 2004). In another strand of literature, Schwartz and Barsky (1977) and Agnew and Carron (1994) show that a home win becomes more likely, ceteris paribus , as crowd density rises...