On the Incidence of an Ad Valorem Tax: The Adoption of VAT in the UK and Cost Pass Through by English Football Clubs

It is conventional in the sports economics literature to assume that professional sports teams are local monopolists and that stadium attendance below capacity has approximately zero marginal cost, implying that prices should optimally be set at the point of unit elasticity, regardless of whether teams are win maximisers or profit maximisers. The empirical literature has puzzled over the finding that prices appear to be set on the inelastic part of the demand curve. This paper approaches the problem in a different way. If the assumptions are true, then tax theory implies that an ad valorem tax such as VAT should be absorbed in full by the sellers. The paper uses company records that identify attendance and gate revenue for over 6000 English Football League games between 1971 and 1974, to examine the impact of the adoption of 10% VAT in the UK on April 1, 1973. The data suggests that pass through rates varied considerably, averaged around 25%, and were seldom zero.