Sunday, April 06, 2008

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.

10 comments:

Spiros said...

"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."

I've never heard of a golf course selling up (or out) to property developers. But it happens often with bowls and tennis clubs.

Anonymous said...

Harry - aren't the majority of your golf costs sunk rather than fixed?

Despite never haveing swung a club other than in anger golf is one "sport" I do have some tolerane for - as it seems to me you could play a decent round dressed in a suit and tie. Oh that more activities had such a dress code.

fxh in beijing

hc said...

Spiros, I am asking around about such things. Courses have failed financially so the situation must present itself.

FXH, Sunk means 'non-recoverable' fixed costs. I don't know how non-recoverable such costs are.

The variable costs are very significant.

Don't get drunk and beat up any Tibetans FXH.

Spiros said...

How do these clubs go with council rates? They must be huge.

Yobbo said...

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.

lol.

sin machete said...

I with a certificate in Commercial Horticulture Landscape Management was under the impression that golf is one of the most destructive hobbies to the environment.
Lets see: air, soil, water pollution with gas/oil/diesel to run: blowers,trimmers,lawn mowers,aerification and dethacthing equipment.
How much water is wasted to keep the turf nice? Fertilizers, fungicides,and herbicides. On top of that add the abominable noise
created by the equipment for those tasks. Somehow golf is the oppossite of a healthy environment.

hc said...

Sin, Many of the golf courses have biodiversity conservation covenants imposed on them so there seems to be some value. But I take your point that there are costs.

I wasn't writing as an advocate for them.

Sam, How would markets work to internalise the fact that residents get a chance to look at a green golfcourse covered with river red gums? I think zoning laws make sense.

davidp said...

One reflection of the way the benefits of golf courses are internalized is house prices near golf courses.

Owning land to some extent excludes others from appreciating the view as much. The benefit of this should be reflected in the price of the house (and would be surprised if there aren't estimates of this effect somewhere).

Likewise the club can internalize the value of the views through membership fees.

My first guess is that the main source of the externalities would be providing habitat for birds and other creatures which can then live around the neighborhood.

There might be un-internalized externalities but would be keen on a more specific argument on this

cheers

hc said...

David, I know this argument - related to Tiebout hypothesis. There are lots of estimates of effects of pollution externalities on property values so I assume the same for positive externalities.

If rates are related to house values then local governments might have incentives to optimally delay redevelopment.

Its an interesting thought.

Nice views for non-residents are partly a pure public good.

Yobbo said...

Sam, How would markets work to internalise the fact that residents get a chance to look at a green golfcourse covered with river red gums? I think zoning laws make sense.

Harry, the point is that same point I'm always trying to make here. Just because you like something (in this case red river gums and green grass) isn't alone enough reason to subsidise it.

Your preference is just that: your preference. Some people couldnt give a toss about green grass and red gums.

Personally I would prefer to look out and see the bright neon lights of Times Square, complete with Casinos, Strip Clubs, Skyscrapers and nightclubs.

Now you don't like my preference and I don't like yours. I hate golf and am allergic to grass.

But the world doesn't revolve around Harry Clarke, why should we subsidise private business that you approve of and not the ones I like?