Some economics of golf

As a keen though not highly-skilled golfer who has just joined a better than average private golf club I am interested in The Age’s discussion of what amounts to golf economics today. Golf courses are finding it difficult to compete with other physical recreations. There are several issues here.

Playing a round of 18 holes of golf is relatively time-intensive. On today’s crowded courses it probably takes you 4.5 hours to actually play a round. That’s excluding preparation and warm-up time, travel time to and from the club and a few drinks in the clubhouse afterwards – on a hot day enjoying the latter might be close to essential!

This time can be reduced by switching to playing 9 hole rounds – not the format of most modern competitions - but the advantage of doing this is offset by fixed costs of getting prepared and travelling to the course. Once I have played 9 holes I want to play at least another 9 given these fixed costs - an instance of the non-irrelevance of fixed costs from a psychic viewpoint.

In addition the modern technology of golf – the probably futile attempts to turn nthe game into a science – means the game has slowed down. Repeated practise swings, multiple views of slopes on greens and careful alignment of golf balls on greens on the basis of pre-drawn ball markings slows things down for other players – an external cost* for them. There have been numerous attempts to speed up the game – adding strokes for slow play for example – but none of these schemes work if you are playing a slow round because the group in front of you are slow.
Many of the costs of running a golf club are fixed costs that reflect land values. One course I know of in Melbourne has recently been the subject of a $100 million buyout offer on the basis of its residential real estate values. There are also considerable labour-intensive costs of golf course maintenance that requires a steady income stream to fund them. Well-run golf courses in convenient locations will inevitably be expensive operations.

It is worth noting that many golf courses provide visual and environmental externalities for the community as a whole which might justify local government restrictions on rezoning them for commercial development.

On the equipment side as I have previously posted, the reduction in golf equipment costs and improvements in golf equipment technology should to some extent boost the appeal of the sport.
Golf clubs are traditionally regarded as instances of what economists call club goods. These are goods which are excludable – you can charge a price that limits the number of participants – only those who pay get to play. But consumption of such goods is also seen as non-rival. Thus in theory once you have joined the club your participation in the sport does not inhibit the participation of other members – in short, there is supposed to be no congestion on a course. Then the conventional way of pricing such services (assuming the club is a non-profit) is to charge an entry fee and perhaps a fixed annual fee for entry to the club to cover the club’s costs but to levy no fee for actually playing a game – to levy a zero ‘green fee’.

This prescription is only valid if the course is not congested by having too many players. If there is congestion then economic theory suggests charging a lower membership and annual fee but some fee each time you play a round.

As an economist I am interested in the fact that many commercially-oriented golf course operations are discarding the whole idea of a membership structure entirely and continuing to be ‘public courses’- Melbourne’s Growling Frog course is an example. Instead of requiring membership any player can play on these courses provided they are willing to pay the ‘green fee’ which seems expensive but which, naturally, has to cover the loss of membership and annual fees. This is a complete abandonment of the club good model – golf is turned into a private good and sold at its market-clearing price.

The advantage of this pricing scheme is that congestion costs can be managed directly by charging a high enough fee. In addition players can vary their choice of club without incurring new membership costs. The disadvantage is that etiquette issues tend to be ignored outside of a club setting. Anti-social behaviour by ignorant or careless players can ruin the enjoyment of the game by others – it can even be physically dangerous if balls are carelessly hit in the direction of other players.

I think of these issues as I had an enjoyable game of golf at a very good regional golf course on Friday that essentially operates as a private course and off to hit a few balls with son William at my local private course today**. I’ll post again on the economics of golf. Wouldn’t it be wonderful if I could pick up a lucrative consultancy in this area that involved some on course inspections!

There is at least one book on this topic (here) while this provides information on the contribution of golf to the overall US economy.

* It is an externality since individual investments of time optimise individual benefits without accounting for costs to others. This is so even if all players choose to play with the same degree of care.

** Update: On the basis of this round the opening description of myself as a 'not highly-skilled golfer' should be modified to 'unskilled golfer'. A disgraceful effort on my part.