Simon Rottenberg wrote about the Uncertainty of Outcome hypothesis: the demand for a sporting event depends in part upon the closeness of competition. The more unlikely the outcome, the greater will be the demand for the event. Just watch the stands clear when one team is up big in the 3rd quarter of a college football game.
Another important factor in the demand for a sporting event is absolute quality of play. The demand for MLB is greater than the demand for high school baseball in part because of the limited "population" served by high schools (relative to colleges and professional teams) but also because there just isn't that much talent on the high school diamond.
Brad Humphreys at The Sports Economist has this to say about steroid use:
From the perspective of economics, much of this seems to miss the interesting parts. We know this: athletes, even at the highest level, have different abilities and all face strong and clear incentives to improve their performance. There is a lot of strategic interaction among athletes, and the compensation system in tournaments skews earnings significantly. Both of these factors amplifiy the consequences of outcomes. And to top it all off, the use of performance enhancing drugs is very difficult to detect, and the regulators and chemists are in an "arms race" that the regulators can't possibly win. Athletes face powerful economic incentives to dope and have easy access to new doping methods that are hard to detect. Under these conditions, many will use performance enhancing drugs, and most will get away with it.
The interesting economic angle relates to the question Rod Fort raised in the comments: "does anybody on the revenue generation side really care?" My answer is no. Event organizers desire absolute quality to increase interest in their events. World records, amazing performances that go well beyond what 99% of the population can do, "the human drama of athletic competition" bit. Sports fans, especially casual sports fans, are primarily interested in extraordinary performances. During the McGwire-Sosa home run race a few years ago, how many people said "I'm not paying attention because they are both on the juice?" Plenty of incentives exist to look the other way on the doping issue on the revenue generation side, but nobody pays much attention to it.
It's simple to show that relative performance would probably be unchanged if everyone used steroids. But absolute performance would be improved. This increases interest in the sport and drives event organizers' profits higher. It's no wonder that they have looked the other way.