Hole in one - best approach to measuring the benefits of the PGA LIV merger

As we discussed in part 2 of our summer series, the PGA Tour, DP World Tour and LIV Golf announced an ‘in-principle’ merger agreement in June 2023.?To justify this merger, the parties have cited numerous benefits that golf fans can expect to gain.?Key amongst these are: the benefit of the best players in the world playing together more often; more funding being available for golf; and an end to the legal action between golf leagues.?

To consider the economic benefit to consumers, we need to first identify the mechanism through which these outcomes from the merger will affect consumers.?This is because consumers are not the direct recipient of these cited factors.?Consumers do not personally receive the increased golf funding, and do not derive benefit simply from, for example, seeing Rory McIlroy and Bryson DeChambeau on the same golf course.?Instead, consumers derive value from the output these activities produce, rather than the activity in and of itself. ?In effect, the activities from the merger are ‘inputs’, which can be used to generate an ‘output’ that consumers value.?The graphic below illustrates how this process works.

Putting this in the context of the golf merger, whilst the ‘activities’ of the merger are increased funding and the best players playing together; the ‘outputs’ that consumers benefit from, are the improvements in price or product quality.?Given the benefits the merging parties have cited, the former is likely to be the main driver of benefits.

There are two methods of economic analysis to quantify the value of this type of intangible benefit.?

• Revealed preference.?The value of market goods or services as a proxy for understanding the value of non-market goods or services.
• Stated preference.?The assessment of the ‘value’ of goods and services that do not have a market price since they are not directly sold.

In the context of golf, we can estimate revealed preference by looking at how much more fans are willing to pay to go to certain types of events.?The most accurate way we could calculate this is to look at how much more fans pay to go to golf events where the top players compete against one another.?However, we do not have a perfect proxy to compare against – in golf, the only times top players consistently play together is during the four majors.[1]?These events create other benefits for fans (for example, historical prestige), so revealed preference will also account for these other benefits in addition to the top players competing together.

The other way we can use revealed preference is to look at other sports.?We can assess whether mergers or the creation of new leagues has impacted what fans are prepared to pay to watch these sports.?For example, we could assess the effect of the NFL / AFL merger in 1966 on American football; or the more recent impact of replacing old T20 Leagues with franchise tournaments in cricket.?

However, the drawback of this method is that it assumes fans’ valuations will be consistent between sports.?This is unlikely to be the case – for sports where the players are more famous or there are greater benefits from increased competition, fans are likely to be prepared to pay more to see them.?For this reason, as the proxies we use become less similar to what we are trying to measure, we need to be more cautious about how much weight we place on them.?

Where there are no suitable proxies available, we can use stated preference instead.?This works by surveying sports customers to see how much they are willing to pay for particular products.?In general, revealed preference is considered to be preferable to stated preference because consumers sometimes struggle to accurately gauge how much goods cost in an abstract context.?In the sports context, it is difficult to predict whether this would be the case or not.?Consumers have easy access to information across a wide range of competing products.?Therefore, you could either argue: (i) they have better information and so are more likely to make an informed decision; or (ii) they have too much information and so could struggle to identify the appropriate substitute.?

Considering this on balance, we think that the best estimate of the benefits of this merger would likely rely upon a combination of both revealed and stated preference data. ?This is because both methodologies have potential limitations, which can be mitigated when they are cross-checked against each other. ?It will be interesting to see what transpires and whether this type of analysis is used.???

[1] ?????The four majors are: The Masters; The US Open; The PGA Championship; and The Open.?