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Nhl Profit Maximization Case Study

1855 words - 8 pages

Do NHL teams profit maximize? Explain how the authors come to this conclusion.


Before we dive into the details on whether the NHL team or any sports team for that matter maximize profit, it would be worthwhile to answer 2 basic questions as put forth by the author:

 Would a sports fan not go to a game which he is die-hard fan of because he/she thinks the team profit maximizes?
 Would a sports team forego additional revenue?

As with any commodity, price of an arena seat is set by supply and demand. This is why it always rings false when NHL execs try to link ticket prices to player salaries.

Any sports game ticket demand in North America is influenced by a number ...view middle of the document...

But in markets where demand was weak, ticket prices rose less because it’s tough to raise prices when fans aren’t lining up to see the games

What is Profit Maximization?

A process that companies undergo to determine the best output and price levels in order to maximize its return.

Profit Maximization Methods Used:
(1) Total Cost-Total Revenue Method.
(2) Marginal Cost-Marginal Revenue Method

Total Cost – Total Revenue Method
Profit is simply the Total Revenue minus the Costs incurred. Therefore by simply doing a multiplication and subtraction approach, the quantity and price of different permutations can yield the profit maximization levels.

We have to take into account Opportunity Costs as well when we account for profit maximization in an economics perspective else we would be obtaining the same only in an accounting perspective.
Marginal Cost-Marginal Revenue Method
An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).

Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
At the output level at which Marginal Revenue equals Marginal Cost, Marginal Profit is zero and this quantity is the one that maximizes profit.
Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero or where marginal cost equals marginal revenue and where lower or higher output levels give lower profit levels

Analysis of Profit Maximization per the Article
Profit Maximization in this article has been done using the Marginal Cost- Marginal Revenue method outlined above.

There are a few assumptions that are taken into account:
(i) Costs that vary with attendance are small so profit maximization coincides with revenue maximization
(ii) Games are sufficiently homogenous though in actuality depending on fan following or stadium etc it may differ. The factors affecting demand for ticket is outlined in Section above.
(iii) A single price depicts a team’s choice alternative though this does not hold in real circumstance where the pricing varies based on the seat allocation.

The author has begun his analysis with a (Inverse) Demand function.

What is an Inverse Demand Function?
In economics, an 'inverse demand function', P = f−1(Q),is a function that maps the quantity of output demanded to the market price (dependent variable) for that output. Quantity demanded, Q, is a function of price; the inverse demand function treats price as a function of quantity demanded, and is also called the price function.
Contrary to what we think, an inverse demand function is NOT the reciprocal of...

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