Friday, October 07, 2011

Would MLB salaries drop if all players were free agents? Part II

In my previous post, I said I had another argument for why free agent salaries would drop if all players were free agents. Here it is.

Right now, some players are free agents. Their value seems to be about $4.5 million per win.

Now, suppose that, instead of *more* players being free agents, *fewer* players become free agents. In the extreme case, suppose that only one player is a free agent, with a value of 1 WAR. What happens?

It seems like his price will be bid up. But why? It can't be not scarcity in and of itself. Because, even in the real world, when there are lots of free agents, there is still be a time when there's only one left, and HIS price still seems to be $4.5 million per win. There's something else going on. Here's what I think it is.

In in a world with few free agents, wins must be distributed without regard to where they can make the most money. They go to whichever teams made the best draft choices or trades. That's inefficient, financially, for the league as a whole.

The Yankees value wins highly, and would like to buy more, but they can't. The Pirates don't value them much, and would like to sell some to the Yankees. But MLB rules forbid that. So the Yankees are stuck with many fewer wins than they want, and the Pirates are stuck with many more.

So what happens when this one and only free agent goes on the market? Clearly, the Yankees and Red Sox are desperate for wins, with which they can make a lot of money. They'll easily outbid the Royals and Pirates.

But why will the price wind up higher than $4.5 million? Because $4.5 million is the price that results when teams have the ability to fill a lot more of their needs. The Yankees may have been blessed with only 80 wins from their farm system, but they've been able to sign free agents to bring themselves up to 95. And $4.5 million is the value of that 95th win. The wins before that, they valued much higher (or they wouldn't have bought them).

But, in this case, the Yankees are truly stuck at 80. That 81st win they're thinking of buying must be worth more to them than the 95th win (which is worth $4.5 million). And so, they'll be willing pay a lot more for it.

The same logic applies to the Red Sox, and the Phillies, and other teams, and so the price of the single free agent gets bid up well beyond $4.5 million.

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That argument shows that fewer free agents means higher costs. That means that more free agents means lower costs, which is what we were trying to prove.

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Another thing we can conclude is that the more free agents there are, the less competitive balance. Why? Because the fewer the number of free agents, the more wins are distributed haphazardly among teams. Since teams aren't allowed to sell those wins, small-market teams wind up with wins they otherwise wouldn't have bought. That means more competitive balance.

If all players were free agents, it's possible that some teams would not find it profitable to buy ANY wins, and would stay with replacement-value, minimum-salary players. Obviously, that means competitive balance suffers.

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At the risk of my usual overkill, here's another way to look at it:

Suppose that there is a fixed supply of BMWs. In a free market, only rich people would own them, because they're of little use to poor people (who can't drive them much because they can't afford much gas or maintenance). There might be 100,000 rich people in the city who might fancy a nice BMW, but only 10,000 actual cars. So the BMWs go to the people who bid the most for them, and maybe the auction price is $50,000 each.

Now, suppose MLB calls half of the cars "draft choices", airdrops them randomly on households, and prohibits selling them for what they're worth. The poor people are happy to have them, since they're free, but they don't get much benefit from them. On the other hand, the rich families who got them are thrilled: some of them were about to go out and spend $50,000 on one, and now here's one for nothing!

But now, that leaves only 5,000 cars left for auction. And there might still be 99,000 rich people who are interested. Obviously, with fewer cars available on the market, but not many fewer buyers, the price goes up, maybe to $100,000.

Also, "competitive balance" increases. It used to be that the rich owned 100% of the BMWs. Now the rich only own maybe 60% of the BMWs.

And, none of this would happen if the poor people were allowed to sell their cars to the rich people. In that case, the cars would still go for $50,000, same as before, and "competitive balance" wouldn't change. If Bud Selig changed the rules so that the poor could sell to the rich, both the poor and rich would benefit: the poor people would have more money, and the rich people would get their cars cheaper.

Who wouldn't benefit? The BMW fans rooting for poor people. These fans don't care how much money their poor friend has: all they live for is the day that their poor friend drives a BMW to the World Series! Before, when their poor friend had to keep his car, they had some hope. Now that their poor friend will almost always sell his airdropped car, they have little to no hope.

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Another thing we can conclude is that it must be true, right now, that there do exist poor teams who have BMWs they'd like to sell but can't. In previous posts, I assumed this didn't happen, to keep things nicely theoretical. I assumed that even the Royals can earn a little bit more by buying a win or two, at the going rate of $4.5 million.

But now we have evidence that's not true, that there are some teams who want to sell wins but can't.

Why do I say we have evidence? Because the previous post showed that, today, if all players were free agents, the price would come down. This proves that there must be at least some BMWs being held by poor households. Otherwise, it wouldn't matter if you airdropped all the BMWs, or none of them: either way, they'd go to the same rich people at the same price. The fact that free-agent restrictions are increasing prices proves that MLB could make more money redistributing wins to the rich teams.

But, that makes an additional assumption: that the fans only care about wins, and not about the fairness of a sport that organizes itself so the Yankees will always be great, and the Royals will always be bad. As I once wrote, I think that even though wins seem to drive revenues today, the fans might get sick of it in the future, and MLB might be better off sacrificing some short-term revenues in favor of keeping the fans interested in the long-term.

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In summary, I think these arguments lead to a few real conclusions about the current state of MLB:

1. More free agents would mean lower salaries for those free agents;
2. MLB could make more money by allowing small-market teams to sell players to big-market teams;
3. A marginal win is worth an equal $4.5 million not to all teams, but only to the middle-class and rich teams;
4. The "arbs" and "slaves" do, in fact, contribute to competitive balance.

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3 Comments:

At Monday, October 10, 2011 12:51:00 PM, Anonymous The Best Colleges said...

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At Monday, October 10, 2011 4:12:00 PM, Blogger Phil Birnbaum said...

Thank you!!

 
At Saturday, July 07, 2012 7:12:00 PM, Anonymous BBCOR said...

Absolutely! When the arbitrator ruled the reserve clause was not legal all players would become free agents every year. Marvin Miller knew the laws of supply and demand and hence negotiated with the owners that free agency would be staggered. The owners thought they were getting the best but Marvin knew better. This was explained in detail on Ken Burns Baseball series on PBS.

 

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