Thoughts about our National Pastime and occasional thoughts for the Good and Welfare of the Reader (and maybe the writer)

Sunday, March 1, 2009

Manny and Scott and the Law of Supply and Demand

You remember the law of supply and demand. It was the second lecture of your economics class. The first lecture was the professor telling you that this was going to be the most important class you would ever take and giving out the reading list.

Put very simply the law says that when prices are lower, people will buy more of a good and, as a result, they start bidding up for a portion of the supply on hand. So prices go up. And, when prices go up, producers are incented to produce more. And, eventually, there is too much of the good and, in order to move the products, prices are lowered.

In that construct, supply and demand are constantly seeking a happy medium, called equilibrium. To some economists, equilibrium is a seldom-achieved ideal. To Communists it is a natural event because they can control both ends of the equation and make it so.

The concept relies on the existence of a market. We define a market as a set of would be buyers who share a common need (baseball owners who need the services of good players in order to win a championship); a set of would be suppliers who have a solution (sports agents representing star players) and some mechanism for bringing buyers and sellers together. There is more, but that is enough for where I am going.

There are a number of events that disrupt the operation of pure market even in the face of our belief in free markets. Some examples are minimum wage laws, emission standards, rent controls and Scott Boras.

Scott has his own version of the law of supply and demand. His notion of equilibrium is the price he has invented and calls “the market for this player. The problem occurs when that market is alive only in his mind. Take the ongoing Manny Ramirez saga.

Boras controls the supply (Manny) and, in this case, he seems to have invented the demand, I have scoured the blogosphere, the local LA media, and the media in other plausible cities and I cannot find out who Boras means when he says that there are other conversations going on. San Francisco is, admittedly, hanging in on the periphery. Maybe they think that there will be a distress sale.

But, for now, it is the Dodgers bidding against themselves. And, the whole issue seems to revolve around how much gets paid in 2009 and how much gets deferred.

From Manny’s standpoint, it makes sense to want more up front. Even with CD rates hovering around 2-3%, there is an opportunity cost, a risk factor and an inflation assumption to deal with. The promise of $20 million four years from now is worth less than the same $20 million on the barrel head.

From Boras’ standpoint, it makes sense to get more. He had Manny walk away from $40 million (negotiated by another agent). Now, he has to deliver..

From the Dodger standpoint, however, deferral makes sense. I am not at all in the know about their liquidity, but I assume they would have to borrow in order to make the payment current. Credit is tight and there is no guarantee that they can call on support from their banks. In addition, MLB has instituted a cap on how much debt a team can carry. Deferring the payment and not borrowing, might be the only course open to them.

As of this writing, about 8pm LA time, spring training is continuing without Manny. The Dodgers lost to the White Sox with Juan Pierre going 0-3 in left field and no other team has stepped in to white knight the deal.

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