Salary caps are a hot topic in sports, debated from the most casual of sports fans to the highest tiers of professional clubs. Enforcing a limit to how much a team can spend on their athletes' salaries has been around at least since the Great Depression, and with the current 2010-2011 NFL season being upcapped, the cap debate goes back and forth more than Brett Favre in the off-season. (For more, see Who's Cashing In On Pro Sports Revenue?)
In most professional sports, teams must adhere to a predetermined amount of money to find good players, which is determined by a somewhat complicated mathematical equation involving how much money the league made in the previous year, ticket sale profits, merchandise sales, television contracts, divided by how many teams there are and something do to with the Mayan calendar. So how has this affected sports over all? For the fans, it's actually not much of a game-changer.

IN PICTURES: Money Can't Buy Happiness, But What About Championships?

Highway Robbery, Minus the Highway
Anyone who's ever attended a professional sports game has probably felt like they paid a lot for their ticket. After all, you're only renting a space that's half the size you would take up if you were at home, and most people attending are getting a view that is worse than watching it on their own HD television. But everyone knows it's not about that, it's about the experience. So we pay.

But are the prices more expensive when there are no salary caps? Some current research into the topic shows that ticket sales and merchandise sales aren't directly affected by salary caps. Both tickets and merchandise are mainly determined on something much more basic - profits. According to a study by the University of Antwerp in Belgium, teams determine the amount of profits they want to make off of ticket sales, factoring in the demand of their team, and then set prices based on those figures. (Do you know how much commissioners are paid? Check out 5 Top-Paid Sports Commissioners.)

For example, some research done by Gerald W. Scully shows that for each home game won during an early 1990s season in MLB the average club's attendance was raised by about 3,500 attendees. The increase in attendance obviously translates into an increase in profits at the gates. So the more wins a club has, the more ticket sales it brings in, regardless of salary caps. Scully also reported that besides championship teams, ticket prices typically increase around the same rate as inflation.

Think of it this way, when a club has a stadium, workers and players all on their payroll, those costs are part of the total expenses regardless if one or 30,000 fans show up to watch a game. What the study says is that because the cost of an attendee is close to zero, because the club would be paying for everything even if that fan isn't there, then each ticket sale equals a profit and therefore the prices are determined by how much profit the club thinks it can make.

Salary caps, either high or low, do not have a trickledown effect to cheaper ticket prices.

IN PICTURES: Top 5 Super Bowl Host Cities

What the Salary Caps Do Influence
Although salary caps don't directly influence merchandise and ticket prices, they do affect how teams acquire and retain athletes. The salary caps allow teams with less talent to have the opportunity to entice players away from better teams because all teams (theoretically) have the same amount of money to work with. Instead of having some teams with deep pockets and some teams with little to spend on talent, all teams should have the same buying power and ability to build a strong franchise.

Obviously, capping the amount a team can spend on players affects how much athletes can earn in any given year. This sometimes causes top performing athletes to protest cap restrictions, causing serious implications for sports. In 1994, almost the entire Major League Baseball season was called off because the players and the league couldn't come to an agreement on a proposed salary cap. Owners insisted on the cap, while players refused to play.

Besides strikes, salary caps also effect how players get paid. When a multi-million dollar contract is awarded to a player, the salary isn't necessarily divided up evenly each year. A player may get less than a million dollars one year, over a million the next and then get the remaining millions he is owed during his third and fourth season. This allows the team to have more room to get out of a contract and to be able to plan out how their team budget meshes with their actually salary cap number. Since this isn't the best set-up for players, teams can sometimes offer signing bonuses to players which may or may not be included in the overall salary cap structure.

The Bottom Line
As the salary cap discussions continue on, it's good to remember that professional sports is big business with tons of financial factors that influence how salaries are paid, how high ticket prices are set and how salary caps are established. But at the end of the day, profits are what drive the major financial effects on the fans. It all comes back to supply and demand. (To see who's raking it in in sports, check out the Top 7 Pro Athlete Contracts.)

For the latest financial news, check out Water Cooler Finance: The End Of The Recession.

Related Articles
  1. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  2. Investing News

    Super Savings for Your Super Bowl Party? Bet on It

    Prices for wings, avocados and TVs are all coming down, which will make your Super Bowl 50 festivities less costly.
  3. Investing News

    Are Super Bowl Ads Worth Their High Cost?

    Are Super Bowl ads worth the investment? A look at the cost and how they're received.
  4. Budgeting

    Got a Raise? 7 Smart Things to Do With It

    If you get a raise and spend all of it each month, from a wealth-building perspective you didn’t get a raise at all. Make that extra money work for you.
  5. Mutual Funds & ETFs

    The Top 4 Entertainment ETFs for 2016 (PEJ, XLY)

    Learn more about the entertainment sector, the companies that are included and the four ETFs that provide investors with exposure to this industry.
  6. Personal Finance

    Salary Negotiation Strategies That Can Backfire

    While you want the best salary you can get, failing to understand when, how, and why to negotiate may lead to undesirable results.
  7. Markets

    Top Investment Banks in the Sports Industry

    Find out why the top investment banks in the sports industry tend to be smaller niche players and are prepared to battle the Wall Street giants for business.
  8. Retirement

    How Pro Athletes Can Choose the Right Advisor

    When it comes to finances, professional athletes can be vulnerable. Here's what they need to look for in a financial advisor.
  9. Investing

    How FanDuel and DraftKings Work

    DraftKings and FanDuel lead the daily fantasy sports industry, supported primarily by advertising, entry fees, media companies and sports leagues.
  10. Personal Wealth & Private Banking

    Five of the Best Yacht Clubs in Seattle

    Seattle doesn’t have a year-round sailing environment, but there are lots of opportunities for boating enthusiasts, from modestly priced to high-end clubs.
RELATED FAQS
  1. How does a cost-of-living adjustment (COLA) affect my salary?

    Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. ... Read Full Answer >>
  2. Does working capital include salaries?

    A company accrues unpaid salaries on its balance sheet as part of accounts payable, which is a current liability account, ... Read Full Answer >>
  3. Do financial advisors need to meet quotas?

    Most financial advisors are required to meet quotas, particularly if they work for firms that pay base salaries or draws ... Read Full Answer >>
  4. What is the difference between AGI (adjusted gross income) and gross income?

    In the United States, individuals pay taxes based on their adjusted gross income, or AGI, rather than their gross income. ... Read Full Answer >>
  5. How is marginal propensity to save calculated?

    Marginal propensity to save is used in Keynesian macroeconomics to quantify the relationship between changes in income and ... Read Full Answer >>
  6. How can minimum wages contribute to a market failure?

    The minimum wage acts like a price floor on labor, reducing the supply of jobs available to a level below the market-clearing ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center