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forthcoming in the Australian Economic Review At one time the attraction of overseas events was seen as a simple benefit to the
nation as a whole. By attracting circuses, rock concerts or works of art to the country,
promoters brought events whose social and economic rewards were shared by many.
Of Grand Prix and Circuses* Recently, however, the perception that the value of an event is potentially widespread
has changed. Today’s major events have a local value to a single city or State. And
with this, the attraction of events has become a competitive rather than a cooperative
by
venture. The high profile rivalry for major events such as the Indy Car, Formula One
and Motor Cycle Grand Prix are but one manifestation of the notion that major events
JOSHUA S. GANS constitute local and not national public goods.1
What accounts for this change? On one level, the spillovers that major events
School of Economics, University of New South Wales provide are localised. When considering Grand Prix, the lion’s share of the benefits
Sydney, NSW 2052 come from increased tourism expenditure. But this additional expenditure does not fall
E-Mail: J.Gans@unsw.edu.au
to Australia like manna from heaven. Studies have shown that the vast majority of
First Draft: 27 December, 1995 tourism generated by such events come from “expenditure switching” domestic
This Version: 17 June, 1996 residents (Mules, 1995). Their tourist dollar is a scarce resource. So when one city
wins an event others around the country lose a bit of their own business. Any State or
city leaving the task of attracting major events to others will find themselves worse off
in the tourism (or any other investment) stakes.
On another level, the events themselves are larger and less divisible. While a
Abstract. The public competition between States for major events such as
the Indy Car, Formula One and Motor Cycle Grand Prix is analysed from circus can come to two towns, a major event cannot be shared. To the extent that the
a simple game theoretic perspective. It is demonstrated that the such benefits of a particular event are local, this raises its marginal value in the competitive
competition is, in general, harmful to the States themselves. Competition
leads to greater payments for events to promoters, distortions in the type arena. Only one city will realise the benefits of a particular event, but this makes the
of event eventually held, and sometimes, the wrong State holding the
event. These considerations give a prima facie case for central costs of losing, discussed above, even more salient.
coordination of event attraction to Australia. The costs of losing and the indivisible nature of major events combine to
Two Line Summary. Competition between States for major events results
generate fierce competition for their staging. To the extent that much of the benefits of
in higher payments, distortions, and, sometimes, the mislocation of events. events are of a public good nature, governments have armed themselves with special
organisations to improve their competitive advantage. Beginning with the Queensland
Events Corporation in 1988, Victoria and South Australia have followed with Special
Events Units of their own (Mules, 1995). These organisations have as their primary
objective the attraction of major events to their respective States on the basis of their
potential economic impact. But the interest goes beyond such organisations and the
highest levels of State governments have begun to play explicit roles in event attraction.
This increased competition between the States for major events has been viewed
as just another part of the new era of deregulation. The bidding for these events was
seen as healthy and a warning to State governments against complacency (see The
Australian, 18 December, 1993, p.16). An analogy was drawn with the increased
competition in our industries that forced firms to be on their toes and become more
*
This is a revised version of the paper presented at the December 1995 Conference on “Regional productive. Bidding for events was said to ensure that:
Economic Issues in Australasia” sponsered by the Economic Society of Australia (NSW) and Business
and Econometric Forecasting Group (CAER). I thank participants at that conference, Maxim Engers,
1
Trevor Mules, Robin Stonecash and Trevor Stegman for useful discussions. All responsibility for Included here is rivalry for investment projects such as the Fox Movie Studios. The Olympics are an
views expressed lies with me. exception in that the rivalry was organised within Australia before a bid was submitted.
3 4
(I) Events went to the States that derived most value from them; Nonetheless, even in this simple case, the potential costs of interstate rivalry can be
and made explicit. 2
(II) More preferable events were attracted. Here, I will consider only a game between three players -- the event promoter
and two State governments. For instance, with regard to the Formula One Grand Prix,
But competition between States for major events is not like competition among the relevant event promoter was the London-based Formula One Constructor’s
firms. When firms compete, the beneficiaries are consumers who potentially buy more Authority headed by Bernie Ecclestone and the bidding States were, of course, Victoria
products of a higher quality and at lower prices. But who are the beneficiaries when and South Australia. There may have been other important players -- for instance, other
two States compete to hold a major event? Here I will argue that it is the event promoter State governments, sponsors and overseas governments -- but they are not considered
-- an organisation that holds monopoly rights over the supply of a given event. here. Putting them in would only complicate the story and not alter the nature of the
Moreover, this promoter is usually located away from Australia so that their profits are costs to be demonstrated below.
not even part of national income. For this reason, when looking at the healthiness or Before looking at the outcome of the game, some additional details need to be
otherwise of interstate rivalry, the benefits or losses of the promoter should be left from specified. The most important of these is the value of an event to the players. The
the calculus. When this is done, the costs of interstate rivalry become high and promoter places value on having a “successful” event. This success could be in
numerous. concrete terms such as high ticket receipts and television royalties. Or it could be
How does a promoter gain from interstate rivalry? When bargaining with an something more subjective in line with the particular social and cultural goals of their
individual State over the details of the event, the eventual outcome depends on the organisation. Also, the promoter prefers to receive a higher compensation for holding
bargaining power of the promoter vis-a-vis the State. The promoter’s power in the event. This compensation is, however, a direct loss to the winning State and hence,
bargaining is strengthened when the promoter can make a credible threat to pull out of is a key item for negotiation. But States also place value on having a “successful
negotiations with one State. Credibility hinges on there being other bidders to turn to. event.” Success might be on the same criteria as the event promoter but the existence of
By playing off bidders, the promoter extracts more of the rents generated by an event. tourism spillovers and potential tax revenues adds an additional element to a State’s
And when the alternative bidder is another State, this increased share is a direct loss, preferences. Finally, a State that does not hold the event may face some losses in terms
not only for the winning State, but for the entire country. of tourists switching expenditures to the winning State.
It is the goal of this paper to examine the potential costs of interstate rivalry from First, I will consider a contest over a single type of event. It is assumed here
an economic point of view. In so doing, I will use the efficiency criteria of looking that the value of a “successful” event to the promoter is $200. The social value of an
predominantly at national social welfare, but I will also show that individual States may event to State Government 1 is $1000 and to State Government 2 is $800. (Recall these
lose from rivalry as well. It will be argued that the event the potential benefits of are just numerical examples and their levels are for demonstrative purposes only).
competition -- (I) and (II) above -- can be lost in the competitive struggle. Moreover, These values are summarised in Figure One. It will be assumed here that the potential
the more “strategic” a government in attempting to win an event -- e.g., by engaging in losses to each State of losing the event are $100. Note it is the fact that there are losses
a silent bid to snatch an event from another State -- the greater the potential costs of here rather than the size of these losses that is relevant for the outcomes discussed
competition. below.
A Simple Model
This is the event distortion cost: interstate rivalry means that the event offered is
Figure Two: Choosing Type of Event I
distorted from the type that is socially optimal. The State trades-off the type of event
Event S offered against a reduction in compensation paid. In general, this trade-off will be more
salient for economic than social or cultural dimensions of events. This means that
Promoter claims and public protests that major events are being run too much on economic
Value = $200 benefits to the neglect of environmental and other concerns could in part be the result of
the competitive process between States. State governments are forced by competitive
pressure to compromise on these dimensions in order to ensure they win the event,
even if it is not the type they would most prefer.
State 1 State 2
The size of the event distortion cost depends upon the relative value of event P
Value = $1000 Value = $900
being higher for 2 than for 1. Comparing event S and P, the difference is $100 for
Losing Cost = $100 Losing Cost = $100
State 1 but only $50 for State 2. In the appendix, in a slightly more general model, I
demonstrate that this difference in marginal value for events drives the magnitude of the
versus
event distortion.
Event P What if, however, these differences in preferences among States were so much
that State 2 shared the promoter’s preference for event P, or at least was indifferent
Promoter between the two? An example of such preferences are depicted in Figure Three. Here,
Value = $300 while the individual negotiation outcome would result in State 1 staging event S, under
competition, State 2 is able to out-bid State 1! This is despite the fact that the event with
the highest social value is S in State 1. In this case, State 1’s best offer is event P and
$950 -- its highest offer with event S involves the promoter receiving less. State 2 can
State 1 State 2 match this and still receive a positive payoff. Therefore, the promoter gains $1350,
Value = $900 Value = $850
State 2 loses $50 and State 1 loses $100. State 2 makes a loss but not as much as it
Losing Cost = $100 Losing Cost = $100
would if it did not stage the event. This also demonstrates the possibility that, with
competition, it may have been preferable for no event to be held in Australia at all! The
In this case, a “split the difference” individual negotiation outcome has State 1 more general model in the appendix demonstrates that in some circumstances 2 could
offering event S and $400 to the promoter. This results in payoffs to the promoter of still win the event without making a loss.
$600 and to State 1 of $600.6 Once again, State 2 will have an incentive to bid for the
event given its potential losses. It could beat State 1’s individual offer with an offer of
event P and $400 and still make a positive payoff. However, the competitive
equilibrium of this bidding contest will have State 1 offering event P and $950. This
would match State 2’s best offer. It involves event P only because State 1’s best offer
of event S would include compensation of $1000 resulting in a payoff of zero. By
offering P, 1 ensures a positive payoff of $50, with the promoter receiving $1250 and 2
losing with -$100.
This example highlights the possibility that competition, while resulting in the
State valuing the event most still winning, has it winning an event that is less beneficial.
6
Observe that another “split the difference” outcome is for State 1 to offer Event P and $300 to the
promoter. Once again, each would receive $600. However, this outcome is less plausible in more
general cases (see Gans, 1995) and hence, is excluded here.
9 10
occupied with an election campaign. The Kennett government did not even inform the
then Liberal opposition in South Australia of their intentions. In July 1993, Kennett
Figure Three: Choosing Type of Event II
flew to London on the pretext of attempting to attract the musical Sunset Boulevard to
Event S Melbourne. Instead, he met with the Formula One chief, Bernie Ecclestone and
negotiated the deal eventually signed in September, 1993 (see Neales, 1993).7 The
Promoter final deal remained unannounced until December 1993, days after the South Australian
Value = $200 election, on the pretext it might harm the winning Liberal party there.
Given the costs of competition derived above, the idea of choosing a strategy
based on silent bidding might, prima facie, be seen as an extremely shrewd one.
However, a proper game theoretic analysis shows this shrewdness to be superficial.
State 1 State 2
To see this, with the payoffs of the simple model above (Figure One), suppose that
Value = $1000 Value = $900
State 2 initially held the event. By engaging in a silent bid, could State 1 have obtained
Losing Cost = $100 Losing Cost = $100
an outcome better than the competitive one in which it received a payoff of $100 (a net
gain of $200 given that 2’s operation of the event)? If State 2 had initially won the
versus
event with its best bid of $900, then matching this bid would not make 1 better off than
Event P the open bidding outcome.
What if 2’s previous offer was less than $900 (say, $700)? At first glance, this
Promoter would allow State 2 to submit a silent bid of just above $700, win the event and achieve
Value = $400 a better outcome than the competitive senario. But this calculation neglects the decision
process of the promoter. The promoter could accept the silent bid but equally could
alert State 2 and institute an open bidding contest. Indeed, so long as 1’s silent offer is
less than $900, the promoter will have an incentive to do this.
State 1 State 2 At this point the objection might be raised that the promoter may not know that
Value = $850 Value = $900
2’s best bid is as high as $900. If this were the case, however, the promoter would
Losing Cost = $100 Losing Cost = $100
have an incentive to find out. One of the best ways of doing this is instituting an open
bidding contest that forces parties to raise their bids until one of them drops out. This
The notion that the “wrong” State could win the event is the selection cost of signals that bidder’s best bid. Incomplete information on the part of the promoter does
competition. It casts doubt on the notion that competition ensures that the State that not make a case for profitable silent bidding on the part of State 1.
could gain the most from the event will hold the event. Observations that a particular Somewhat paradoxically, to the extent that a silent bid is accepted, it may
State wins an event does in itself justify the social optimality of the result. It could indicate a lack of information about 2’s best bid on the part of State 1. If State 1
easily be the case that a slightly different event held in another State could have overestimated 2’s best bid and the promoter knew this, it would be in its interest to
generated a greater social value. accept the high silent bid, lest an open bidding contest actually reduce 1’s initial offer.
Thus, engaging in silent bidding at best results in the openly competitive outcome and at
worst can lead to what is termed in auction theory as the “winner’s curse.” That is,
Silent Bidding and Snatching Events when the value of an object being auctioned is common across bidders, each has an
The picture painted by the above models is that of an open bidding contest. incentive to bid more if their private information on that value is more optimistic. In
However, the reality can seem quite different. The example of Melbourne’s snatching this case, winning a bidding context is bad news in that it implies that your valuation
of the Formula One Grand Prix from Adelaide in 1993 is a good indication of this.
There, no open bidding contest emerged. The Victorian government bid for the event
without the knowledge of the South Australian government who were otherwise 7
Ironically, when he announced in November, that Melbourne would bid for the event, commentators
suggested that he hold just the type of meeting already held earlier (Young and Stenberg, 1993).
11 12
was biased upwards. Hence, because of imperfect information, the winner is cursed apart in the same city, may maximise tourism potential from overseas without any
and ends up paying too much (see McMillan, 1992). overall domestic cost. Such considerations are complex and are left for future research
Therefore, the promoter’s ability to switch to an open bidding context nullified and inquiry.
the seeming shrewdness of silent bidding. This ability can allow a form of implicit
competition and potentially can exacerbate rather than reduce the costs involved in
interstate rivalry.
Appendix
Figure Four: General Model
In this appendix, I reState the model of this paper using variables rather than
Event S
numerical examples. The variables that describe payoffs are summarised in Figure
Four. Consistent with the numerical examples it is assumed here that (i)
Promoter
v − c1 > v2S − c2 , (ii) π P > π S , (iii) v2S > π S , (iv) v2P > π P , and (v) c1 , c2 > 0 . That is,
S
1
Value = π S
1’s net value of holding event S is greater than 2’s, the promoter values event P more
highly than S, the value to 2 of either event exceeds that to the promoter for those
events, and the costs of losing are positive. Because payoffs are linear in the
compensation amount, this means there are no wealth effects and hence, that the value
maximisation principle must hold. Milgrom and Roberts (1992) State this principle as:
State 1 State 2
“An allocation among a group of people whose preferences display no wealth effects is
Value = v1S Value = v2
S
efficient only if it maximises the total value of affected parties. Moreover, for any
Losing Cost = c1 Losing Cost = c2
inefficient allocation, there exists another (total value maximising) allocation that all of
the parties strictly prefer.” (p.36) Thus, any outcome in this game maximises the total versus
payoff of the negotiating parties.
Event P
Value maximisation means that the event chosen in any outcome is the one that
maximises total payoffs. Therefore, I will begin with an assumption that the sum of
Promoter
payoffs for the promoter and State 1 are the same for both events, i.e., (vi)
Value = π
P
v1S + π S = v1P + π P . This assumption was implicit in the example in Figure Two. Note
that (i) and (vi) imply that no value maximising outcome involves State 2 -- State 1 will
always win the event. Under (vi), there are two “split the difference” individual
negotiation outcomes between State 1 and the promoter: (1) State 1 offers event S and
State 1 State 2
compensation, x = 12 (v1S − π S ) ; and (2) State 2 offers event P and x = 12 (v1P − π P ) . Value = v1P P
Value = v2
Because of value maximisation and (vi) there are always two such outcomes. Losing Cost = c1 Losing Cost = c2
However, as mentioned in the paper, more general models without value maximisation
tend to favour individual negotiation outcomes such as (1) and so here I use that as the
benchmark case.8 Evaluating the effect of competition involves three steps. First, the best offers
for State 2 for both the S and P events need to be determined. These are x = v2S + c2
and x = v2P + c2 , respectively. If π P + v2P > π S + v2S , then the offer with the P event will
maximise the promoter’s payoff. To win the event, State 1 must submit a bid that
allows the promoter to achieve the same payoff as it would with 2’s best P offer, i.e.,
π P + v2P + c2 . These are x = v2S + c2 and x = v2P + c2 for events S and P respectively.
State 2 will prefer the P offer if v1P − v2P > v1S − v2S ⇒ v1P − v1S > v2P − v2S , that is, if the
marginal loss from moving from event S to event P is greater for State 1 than for State
2. In this case, the competitive outcome will involve 1 offering event P. This final
condition is critical in generating a positive event distortion cost. If this condition does
8 not hold competition does not change the type of event held, although it does still result
Note, also, that the “split the difference” outcome is also arbitrary. The point is that competition
weakens that bargaining power of State 1 to such an extent that it would always be better off making in a rent appropriation cost.
an offer involving event P.
15 16
Selection costs can arise if the sum of payoffs for the promoter and State 1 for
events S and P are less than the sum of payoffs for the promoter and State 2 for event
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