Formula 1 World Constructors’
Championship is won every year based on the points system determined through
the Grand Prix results. It is calculated by adding the drivers points in each
Grand Prix. In more than half century of championships only 14 constructors
have been successful. Further these constructors have come only from four
different nations. The most successful is the Scuderia Ferrari which won it 16
times. Only 12 teams compete in this
race from all across the globe of which one wins the top position.
The victory in the
championship yields tremendous dividends. As we know, participation is limited
implying FIA which runs the races is operating in monopsony market. Demand for
slots is high with highly inelastic supply.
Why would firms spend billions of dollars to gain that FIA constructors
crown. In fact in recent years, thanks
to increasing expenditure on technological improvements, firms have gone
bankrupt. Adding to this cost is the astronomical fee of 47 million USD which
each new team has to pay upfront. At one point that due to increased car costs
a scarcity was created which had to be filled up by using Formula 2 cars.
Further if you consider
Formula I Constructors Championship itself as a resource being contested by 12
teams, it is infinitely inelastic. There is one resource per year and only one
team gains.. The price for that resource
is the costs the firms incur in preparing the cars and drivers every year to go
for that ultimate honor. Why firms incur these costs? The answer lies in the marginal benefits they
derive from winning the championship. We know every constructor would compete
and incur expenses until the marginal benefits (MB) equal marginal costs (MC).
If MC is greater than MB, the constructor scales down its participation. However, the windfalls the constructor gains
are tremendous. High profile and popularity makes it an attractive proposition
for merchandising environment. Further
the sponsorship money has increased to more than $800 million in 2011. The
sponsors expect positive spillovers from the championship and indirectly
contribute to the car constructors spending in millions of dollars on drivers
and even minor improvements. Further the
sponsorship money (accounts for 60% of the constructor’s budget) is not uniformly
spread. The front-runners gain most of this budget while the back markers
traditionally lose out heavily. In such scenario being a front runner can mean
life or death for the constructor. While
the top 3 teams gain more than half of the sponsorship amount, the teams at the
rear struggle to raise even a million dollars of sponsorship the following
year. In the contest where engines and technological differences can play a
vital role, budget differentials could play spoilsport for the minor players. The payments for engine development and also
hiring best of the drivers incur further costs and unless the firms get
revenues commiserate with the costs; it is not possible for them to be a part
of the competition. For the marketers,
this is a platform for global marketing and merchandising and promotions. The
popularity of the show can lead to positive spillovers for host of industries
who sponsor the show.
Spillovers for car
manufacturers and sponsors determine why constructors crave for F1 world constructors
championship.
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