Decision to raise number of fixtures in the competition by 51% ignores strategy of excess demand and its long-term benefits
The year is 1991. The place, the University of Chicago. The person, Gary Becker, who just over a year later would become a Nobel laureate in economics. In a famous academic paper, he notes: “A popular seafood restaurant in Palo Alto, California, does not take reservations, and every day it has long queues for tables during prime hours. Almost directly across the street is another seafood restaurant with comparable food, slightly higher prices, and similar service and other amenities. Yet this restaurant has many empty seats most of the time.”
The question is why. Why doesn’t the popular restaurant raise prices, which would reduce the queue for seats? Why doesn’t it increase supply (expand capacity) to reduce the excess demand and capitalise on its popularity? The answer is that doing that would probably not be optimal. It might be highly detrimental to the business.
We see everywhere many goods and situations such as this restaurant. Successful plays in London, popular sporting events, crowded nightclubs, limited edition sneakers, art exhibitions and other businesses and activities do not increase supply to a point where supply meets demand. Many persist with the strategy of excess demand. Why? Why wouldn’t it be optimal to produce a few more sporting events when they are successful?
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Becker’s insight is that these are “social goods”, meaning the consumers’ demand for the good increases with the demand of others. Individuals are more attracted to goods and services that others find desirable and people are more interested in something the more popular it is.
Now, something funny happens in the economists’ basic supply?and?demand framework in these cases. While we all know that demand typically decreases when price increases, when we have social effects demand will increasewith prices in a certain range. Yes, we may want to consume more of a good the more expensive it is. The reason is simple. When we consume these goods, we are not only consuming the goods but also the popularity of the good. And the popularity increases with prices and excess demand. The well-known concept of a “multiplier effect” happens when the demand for popular goods and events creates a feedback loop.
This can explain not only the puzzle about prices and the reluctance to increase supply of successful events, but also why consumer demand is often fickle, why it is much easier to go from being “in” to being “out” than from “out” to “in”. It is harder to increase popularity than to decrease it. Reputation takes time, but as popularity breeds popularity, tamper a bit with it and the demand may be quickly gone.
This is relevant because the Champions League belongs in the category of successful social goods, in fact of very successful goods. Few can imagine a more successful competition involving the world’s most popular sport. And this competition is clearly a social good. If I buy a football ticket, you can also buy one and we will enjoy the game more. If I watch it and you watch it too, we can talk about it tomorrow in the office, and the day after tomorrow. Let’s go to the pub to watch the game. Interactions within the family are of course a prominent place to share the consumption of the sport. The Champions League is clearly characterised by strong social influences, and at a geographical scale much greater than other competitions.
The new Champions League format means that Uefa has decided to increase supply: from 125 games to a total of 189. The motives behind the increase in supply are not important. Whether it is pressure from the attempted creation of a Super League, from the owners of a few clubs in Europe or simply Uefa attempting to capitalise on its success we have a shocking 51% increase in games.
The new format of the Champions League has increased the total of 125 games to 189. Photograph: Tom Jenkins/The Guardian
This means that the excess demand for “top games” has decreased. If popularity depends on excess demand, the new format is taking a huge risk from being “in” to being “out”. This is not opinion and not an artefact of some mathematical equations. It is a fact and unrelated to the reasons why wealthy players and coaches may want to keep the same old excess demand (play fewer games, especially if the salary is the same).
The social dimension of consumption of Champions League games is just one example of the importance of social factors in shaping economic outcomes. Countless examples show that the interplay between individual behaviour and collective market dynamics means that an initial decrease in the excess demand for an “in” good may quickly lead to a decrease in popularity, which in turn will lead to a larger negative overall impact on the demand for that good. This is definitely possible and perhaps likely. A careful quantitative analysis of the “shape of the demand function”, and where the Champions League was before the format change, would be needed to establish how risky the change is and how likely it is to backfire.
But the point that an excess demand is often preferred because it represents a situation where the top games are highly sought-after and vividly remembered needs to be made. While not maximising profit in the short term, this strategy has led to long?term success through brand building and sustained demand. Although the same successful play in London or the same sneakers or art exhibitions can be repeatedly produced, it is clear that Manchester City v Inter in September is not the same good as Manchester City v Inter in April. Top games are not easily reproduced.
Ignacio Palacios-Huerta is a professor at London School of Economics, a fellow of the Ikerbasque foundation and a past head of talent ID at Athletic Bilbao
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