December 16. 2008 by Keegan Hall.

Going to a professional baseball game is as American as apple pie.  Our “national pastime” has garnered fans of all ages and continues to have a dominant role in our society and culture.  As the popularity of baseball and other professional sports have increased over the years, so have the salaries of the athletes who play the game.  Many people complain about the enormous salaries that these athletes receive.  A common sentiment is that athletes are paid far more than their relative “worth” in comparison to such jobs as teachers, doctors and firefighters who all perform essential work that our society cannot do without.  In simplistic terms the massive difference in salaries may seem unjust.  However, through fundamental economic reasoning, we will discuss why athletes deserve their large wages as well as the consequences when athletes are paid too much.

As with any company, the owner is the person that ultimately determines the worth of a particular employee in the form of how much they are willing to pay for their services.  Owners of pro sports teams must carefully examine their potential investments (players) in order to avoid paying too much, which could have catastrophic financial implications.  In many cases the wage of a particular athlete is directly proportionate to the revenue in which they create for their franchise, at least that is the intention.  In 2000, Tom Hicks, owner of the Texas Rangers, signed Alex Rodriguez to one of the most lucrative contracts in baseball history- $252 million over 10 years.  Mr. Hicks did not arbitrarily arrive at this staggering number, but rather he had to estimate the “worth” of Rodriguez in terms of additional revenue he will create.

Marginal Revenue Product

One way to calculate a player’s worth is to measure their Marginal Revenue Product (MRP), which takes into account a player’s past performance, marketability potential, as well as physical attributes such as age, experience, height, etc. in order to gauge a player’s market price.  In this environment the player would likely be paid close to the highest expected MRP.  Since this decision is based largely on limited information and uncertainty, we typically see that athlete wages are far above the actual MRP.  The team that offers the largest wage above the actual MRP secures the player, which consequently results in the player being paid far more that he is actually “worth.”

Before offering Rodriguez a contract, Mr. Hicks had to compute the change in revenue from the franchise when employing one more unit of labor; in this case the additional unit of labor was Alex Rodriguez.  According to economic theory, the cost of employing Rodriguez must not exceed the additional revenue that he is expected to generate for the Texas Rangers.  If the additional revenue generated is less than the $25 million per year that it costs to employ Rodriguez then the investment is deemed a failure, as the team will lose money.  However, if the additional revenue exceeds the cost then Rodriquez’s outrageous wage is justified.

Ideally, the owner of a team expects that each of his athletes will generate additional revenue for their team beyond the wages the athlete receives.  If a players is able to generate multiple millions of dollars in revenue then his worth is just that- multiple millions of dollars per year.  Therefore it is economically justified for pro sports owners to offer such lucrative contracts because they understand the marginal benefit exceeds the marginal cost.  If the opposite were true and marginal cost exceeded marginal gain then the owners simply would not employ those athletes.

Miscalculating MRP and its Consequences

In 2004 Alex Rodriguez was traded to the New York Yankees.  A player being traded to a different team is very common in professional sports however this particular trade was rather unique.  In retrospect it appears as though Rangers’ owner Tom Hicks made a major miscalculation in determining Rodriguez’s worth.  A stipulation of the trade with the Yankees was that Hicks must pay $67 million of the $179 million remaining on Rodriguez’s $252 million, 10-year contract.  In the end, Hicks reduced his labor by one unit (Rodriguez) yet he is paying roughly $9.5 million per year and is receiving zero output since Rodriguez is not even on his team.  Hicks’ major blunder in assessing Rodriguez’ MRP had major financial implications on the team’s bottom line.

Supply and Demand

The large contract offered to Alex Rodriguez is a great example of economist Adam Smith’s theory called “diamond-water paradox.”  Water is an essential component to fostering life, however a diamond ultimately has little significance.  However a diamond is worth far more on market than water.  Fundamental supply and demand principals help unravel this anomaly.  Simply stated, the supply of water is far more abundant that that of diamonds.  Since diamonds are relatively rare, the demand is much higher and therefore the price is higher.  Conversely, water is not a scarce resource, which creates a low demand and thus a low price.  This is exactly the case with professional athletes.  There is a large demand for high quality athletes and owners will pay top dollar to sign them.  Additionally, the actual supply of high quality athletes is rather small.

This is not the case with the majority of other profession such as firefighters, gardeners or doctors.  Economist Sherwin Rosen proclaims some tasks have become so routine that any competent person will achieve the same outcome.  As such, it is much easier for a person to attain the skill necessary for a given task.  For example, there is not much difference in terms of outcome when the best gardener weeds a yard versus the second best gardener, or even the worst gardener as the task is rather restrictive.  This is not the case in pro sports.  The outcomes vary greatly.  Since winning is at a premium, owners will often overpay to secure superior talent no matter how minute the difference in talent may actually be. According to Rosen, sports are such that poor talent is an inadequate substitution for superior talent.  Said another way, pro athletes are far more specialized than their counterparts in other areas of the labor market.  Increased specialization leads to increasing differences in relative income.  So, whether or not you agree with athletes receiving large salaries is irrelevant.  The open market has determined that pro athletes’ outrageous salaries are economically justified.  However, if you’re a pro team owner, be cautious as a miscalculation can have dire financial consequences- just as Tom Hicks.

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December 8. 2008 by Keegan Hall.

Have you ever been curious as to why popcorn is so incredibly expensive at movie theaters? Despite the theater’s fluffy popped kernels being quite tasty, there is actually a reason for this pricing anomaly. In his most recent book, entitled “Why Popcorn Cost So Much at the Movies, and Other Pricing Puzzles,” University of California-Irvine Economics Professor Richard McKenzie explains this conundrum as well as other pricing mysteries. A degree in economics is not a pre-requisite to enjoy this book as McKenzie has seemingly made an effort to omit (for the most part) much of the economics jargon. The resulting effort spawned an insightful and entertaining book that uses relatively basic economic principals and reasoning to explain a variety situations that each of us encounter in our everyday lives.

In the first chapter McKenzie presents a fascinating argument claiming that the 9/11 terrorists have actually killed more people since September 11th than they did on that infamous day. He reasons that the escalating risk costs associated with air travel coupled with higher air travel prices have motivated many Americans to travel by car instead of by plane. Since more people are now driving (instead of flying) the overall number of car accidents can be expected to, and has, risen resulting in more deaths. This is hardly a groundbreaking discovery, as more cars on the road equating to more accidents and deaths seem like a rather obvious conclusion to draw. However McKenzie assembles a plethora of unique evidence to support this claim.

As the book unfolds, McKenzie unravels numerous pricing puzzles such as why stores have sales, the reason for coupons, the relationship between free printers and pricey ink cartridges and others, but none more interesting then the chapter in which the book’s title was derived: Why Popcorn Cost So Much at the Movies. One’s initial reasoning is simply “because theaters can charge a high price.” That is indeed true however, upon further exploration, the pricing theory behind popcorn is much more complex then one might think.

McKenzie proposes that theaters utilize discriminatory pricing to make admission prices cheaper for children. If you have ever taken a child to a theater then you already know that they typically must have popcorn to enjoy while watching the movie. Theaters recognize that children are a driving force behind the consumption of popcorn, which is one of the reasons that children enjoy lower ticket prices.
Additionally, theaters also exercise a form of monopolistic pricing, as moviegoers are not able to bring their own food and drinks. Once a patron passes through the theater’s gates they are at the mercy of the theater’s pricing of food and beverages. As we all know, the prices of such goods at a theater are borderline outrageous however, we have no choice but to pay the exorbitant prices if we wish to enjoy such snacks during a movie.

One of the most enlightening discoveries of the book is that a medium-sized popcorn actually gives you more popcorn than the large tub. McKenzie conducted numerous tests that involved traveling to theaters, purchasing bags of popcorn, and then weighing the contents. He found that, although the large tub of popcorn appears bigger because of the tub itself, the medium popcorn actually gives you more popcorn (8 ounces versus 7 ounces in the large tub). A seemingly trivial but useful finding if you regularly purchase popcorn at the theaters.

Although I enjoyed the majority of the book there were a few chapters in which Professor McKenzie may have overstepped his expertise. In the most controversial yet riveting chapter of the book, “Why Men Make More Money Than Woman and Always Will,” McKenzie references evolutionary processes that date back to the Pleistocene era as one of the reasons for the difference in salaries. Professor McKenzie is an economist, not a scientist or historian. He has no background in science and/or psychology to base such claims.

Continuing with the chapter “Why Men Make More Money…” McKenzie places much of the blame for the difference in salaries on the fact that women are obsessed with looking pretty in order to attract a successful man. This argument may have a place within generalized stereotypes but hardly should be the foundation of a scholarly debate. Also, McKenzie states that one of the main reasons that men are successful is because they want to attract a beautiful woman. He has little fact to base these assertions on and, while the chapter was extremely interesting, it lacked empirical evidence to support his outlandish claims.

Although a few chapters were over-argued and lacked supporting data, the majority of Professor McKenzie’s book included well-written and entertaining banter. Overall I enjoyed this book as many of the price puzzling examples presented were eye opening in their societal implications. McKenzie’s writing style graciously makes this book effortless to read and comprehend. Ultimately McKenzie’s real world examples challenge us to examine the world around us through an economic lens. I would recommend this book to anyone seeking to gain a greater understanding of how basic economics principals can accurately explain pricing enigmas in our everyday lives. Richard McKenzie’s book offers a candid and lively perspective on economics and I look forward to reading his other books.

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October 13. 2008 by Keegan Hall.

Unless you haven’t turned on your tv, read a newspaper, gone outside or talked to anyone in the past six months then you are very aware of an approaching election that is kind of a big deal. It has already been dubbed “the most important election ever” and rightfully so. With such major issues as the state of the US economy, the ongoing war, the quest for universal health care and so many more that need to be resolved, the implications of this election are undeniably apparent.

But who should you vote for? I certainly have my opinion on which candidate I feel is the most capable, however that is not the reason for this post. Instead, I am more concerned with the millions of voters who actually cast votes for candidates that they know nothing about. Now sure, I am all for “get out and vote” mantra that is sweeping the nation, but what if those voters have no idea what they are really voting for? Should we encourage this reckless behavior?

I’m assuming that most people have done their due diligence of researching the candidate that they support and will eventually vote for. However, after speaking with a variety of friends and acquaintances I have alarmingly realized that many of these folks don’t really have a solid understanding as to why they support a particular candidate.

Who is to blame? The media? Many Americans do not seek to understand anything beyond what is spoon-fed to them via the media. This idea has been exemplified throughout the road to election day. For some people the media has erroneously shaped their view of the candidates. As a result, those same people form an opinion of a candidate based on what they saw or heard on tv. This unfortunately leads to uninformed votes being cast.

So, if you’re going to vote this year (which I hope you do) please, please, please dig a little deeper into the background and beliefs of the candidate that you support. You might just learn something that will change your outlook on the election. You owe it to yourself and your fellow Americans. After all, this is the “most important election ever”….

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September 18. 2008 by Keegan Hall.

Sorry y’all. I have not had much free time lately as I have decided to resume my scholastic career by entering UW’s MBA program. This week was the first days of class which consisted of 8-hours class sessions each day. This might sound like an overwhelming amount of time to sit through a daily class but, much to my surprise, the class was extremely interesting and the time seemingly flew by.

Well, gotta run. I must to write a 12-page paper and also give a 35 minute presentation with my group. I need to start researching now!

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August 14. 2008 by Keegan Hall.

A few weeks ago we had our wedding in Bistra, Romania.  It was amazing and quite a production- much more impressive than the weddings from the states.  That being said, the reception was incredibly long.  Too long. How long is a reception in USA? 4-6 hours maybe?  Well, in Romania they take wedding receptions very seriously and simply never want the party to end.  Our reception started and 8pm… and ended at 7am!!!!  11 hours!!!!  And the party would have raged on but we had to shut it down as the bride and groom were getting a little sleepy from the long day that was… Oh well, a great time was had by all…

I’ve got a lot of good stories to tell about the wedding… I’ll save a few for later posts….

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July 9. 2008 by Keegan Hall.

I’ve been in Romania for nearly two weeks now and I think I’m slowly beginning to blend in with the locals. Of course I still receive a mirage of stares as I walk down the street because of my over-sized basketball shorts and pristine Nike’s, but I’m making small strides towards becoming a Bistrian (I made this name up to refer to the citizens of Bistra, Romania).

To prove my Bistrian-ness I hitch-hiked from Bistra to Cimpeni today. I held out my “please give me a ride” thumb and snagged the third car that passed. We hopped into the beat-up, barely running car and greeted the 60+ year old man.

The ride wasn’t too long, maybe 10 minutes total, but the man smoked cigarettes the entire time. A lot! As he finished one then another cigarette would instantly appear. And, oh, did I mentioned he kept all the windows rolled up for the duration of our magical ride? I’m sure you can image how great of an experience this was for a non-smoker like myself but hey, beggars can’t be choosers, right?

A few of the things I’ve done so far:

1. Drink beer. Everyday. At every meal. For no apparent reason. This is the “norm” in Romania…

2. Been chased by a stray dog while running (yes, I’m still running for “fun”)

3. Scored a goal in a soccer match against a group of locals

4. Nearly been in a car accident almost every time we drive (seriously… literally EVERY time I get in a car here I almost die).

5. Ate cow stomach soup. It was pretty good. Looks and sounds disgusting but is actually eatable.

6. Saw a horse galloping recklessly down the street with a trailer attached to him. There was NO driver. The horse was just running…with a trailer…down the street…alone…

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July 7. 2008 by Keegan Hall.

If you are a sports fan or Seattleite they you’re well aware that our beloved Seattle Sonics (and my former employer of nearly 5 years) is packing up its wagons and heading east to Oklahoma City. Who is to blame? It doesn’t really matter now. The bottom line is the NBA no longer calls Seattle home.

I have attended countless Sonics games over the years. Although it has been quite some time since the Sonics have been a winning team (other than the 2005 playoff season) the excitement that was generated within KeyArena will be utterly missed by me and many other fans. I get goosebumps when I think about all the good times that were enjoyed with my Supes. From Ridnour’s behind the back passes to Kevin Durant sinking 3-balls, win or lose the games were a blast and I feel fortunate to have been a part of it both internally as an employee and externally as a fan.

I don’t think the people of Seattle truly realize what has happened in losing our team. For me it has yet to completely sink in. Come next basketball season we will reflect upon what was and only then truly appreciate what we had. The Sonics were more than simply a basketball team. They were a social enterprise that continually united the city of Seattle on and off the court. I suppose it’s time to turn the page and begin lobbying for a new NBA franchise. Although it would be great to have another basketball team in Seattle, the Sonics will be forever irreplaceable.

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June 27. 2008 by Keegan Hall.

Finally- after three flights and two car rides we finally arrived in the microscopic town of Bistra, Romania. The 20+ hours of traveling have definitely taken its toll on me. Add the fact that my 6-month old daughter accompanied us on this trip and I’m sure you can see how I achieved a new PR in personal exhaustion. Needless to say it’s difficult to keep a baby occupied for 20 minutes let alone 20+ hours. I certainly don’t think we made any new friends on the plane. I never knew my daughter could cry so loud…

The entire family greeted us when we arrived at the house- after all it has been three years since our last visit. Although I was extremely tired I couldn’t pass up the opportunity to enjoy the most common Romanian tradition: drinking alcohol (even if I wanted to pass on the drinking my wife’s father wouldn’t allow it- he is the personification of peer pressure on steroids). After a few shots of an unknown type of alcohol (the majority of their alcohol is homemade) we feasted on a delicious dinner of stuffed red peppers.

The time was nearly midnight before we retired to our bedroom. The long and excruciating journey was finally over. We made it. It’s great to be back and I look forward to two months of taking in an amazing culture. Stay tuned…

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May 3. 2008 by Keegan Hall.

My wife and I have decided to take a little European vacation. When I say “a little” vacation I actually mean a two-and-half month long vacation. The extended break will be thoroughly welcomed although I anticipate our trip will not be all fun and games (well, maybe it will…). We are actually planning a wedding that will take place in late June in Romania. The wedding will be a “traditional” Romanian wedding although I cannot tell you what that really means. I have never attended a traditional Romanian wedding so the anticipation of what will take place is extremely exciting. I think the biggest shock will be the 300+ guests that are planning to attend and I will likely be the only American present (ie the only English-as-a-first-language person) so that should make for some interesting conversations…or not…

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March 24. 2008 by Keegan Hall.

If you are in the advertising industry then it is highly likely that you are familiar with the magazine Media Inc. I wrote an article that appears in the current issue (March 2008). My article discusses the introduction and adaptation of eco-friendly materials into outdoor billboard industry. Below is the article- enjoy!

Billboards: Time For Change

Over the past year eco-friendly products have steadily become the obsession of American businesses and consumers. As we forge ahead into 2008 the concept of sustainability will continue to garner more attention- and rightfully so. Already a wide variety of industries have begun to feel society’s pressure to “go green”. One such industry poised to take its share of the public’s pressure is the outdoor advertising industry.

According to the OAAA there are over 170,000 billboards that stretch across America and nearly all of these boards are printed on polyvinyl chloride, or PVC. Most printers use PVC due to its ability to reproduce vibrant images, immense durability, and most importantly, its low cost. Although PVC has a plethora of notable qualities, it is not without its drawbacks.

Unfortunately PVC is not recyclable and therefore the vast majority of these billboards ending up in landfills across the United States. PVC is also widely regarded as highly toxic to water and soil through leaching once in a landfill, creating an extremely adverse effect on our environment. In an effort to remedy these issues, many substrate manufacturers have been working diligently on an alternate solution.

A new substrate is beginning to emerge within the billboard market - polyethylene (PE). PE is significantly lighter in weight (about one-third the weight of PVC), costs less to produce, plus it’s 100% recyclable. Yes, 100% recyclable. For these reasons, many industry leaders feel that PE will soon be the industry standard.

So why isn’t everyone printing on polyethylene? Probably the biggest factor is the fact that most billboard printers have machines that use solvent inks, which do not adhere well to PE and also off-gas once printing is complete. In order for solvent inks to be used, the PE material must first be coated with chemicals that will allow the solvent to penetrate the substrate. Once this coating is applied nearly all of the recyclable qualities of PE are lost and we are essentially back to where we started.

However there is now a solution. A handful of billboard printers have made the significant monetary investment in machines that utilize UV inks. This state-of-the-art technology applies the ink as a thin layer that sits on the surface of the PE material. The process is then finalized when the machine’s high-powered heat lamps instantly dry the ink and permanently binds it to the substrate. Since the UV ink does not actually penetrate the substrate no chemical coating is needed and thus no solvent is embedded with the material. The combination of UV inks with PE material is by far the “greenest” solution available for outdoor printing.

Societal pressure to “go green” will undoubtedly continue to gain support and momentum in the outdoor industry. Fortunately this pressure has facilitated fresh inventiveness within this market, creating more sustainable printing solutions - polyethylene. There is now a more eco-friendly alternative available. When planning your next billboard campaign a responsible decision now has an environmental solution.

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