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

Wednesday, April 1, 2009

Baseball is not a Perfect Market

OK gang, first we have to define it then we have to discuss if it matters that baseball is or is not. So, get out your economic text books and let's plunge into another chapter of thinking like an economist does.

We are going to look at this from team to team standpoint. You could argue that the team to fan enterprise is a market, and it is. It might also be possible to look at this question on a league to league basis, but today, let's stick with the market for players – a market that was created with he advent of baseball.

A perfect market is a market where there is perfect competition because of the set of conditions or assumptions. Perfect competition, while it is a theory out of classical economics, is often used in evaluating a sport – although the term more often used is competitive balance. The idea is the same, though. The concept is that all the competitors are striving to achieve the best result and that all have the same opportunity to do so.

The following assumptions describe a perfect market. Let's see how MLB holds up.

There are a large number of buyers and a large number of sellers. Major League Baseball is a private market with only a few members -only 30 teams. It is better than it was before free agency but on any given day, all 30 can be buyers or sellers or, sometimes both. So, it can be said that the buyers and sellers represent 100% of the market, but there is a limited number of players.

The quantity of goods bought by any individual transactor is so small relative to the total quantity traded that individual trades leave the market unaffected. Because of the effort of Scott Bores and others in his profession, to constantly stretch the limits, a single free agent deals can affect the market, at least for the super stars. However, the arbitration process is heavily dependent on creating valuations based on statistics and so below the top handful, no other individual transaction will move the needle.

The units of goods sold by different sellers are the same and the product is homogeneous. The unit of goods is one: one player. We could be here all day on the question of whether all players are same, but we know they are not. And, player values change based on team needs. Just today, the usually stingy Marlins went over their per-player limit to obtain Ross Gload who is a Kansas City cast office. He had no value to the Royals, but the Marlins were without a left hander on their bench. Even the players union recognizes that some players are worth more than others. The union agreement sanctions a top 17% who are eligible for arbitration one year earlier than the rest, for example.

There is perfect information. In other words, all buyers and sellers have complete information on the prices being asked and offered in other parts of the market. This is a condition that agents disrupt. They dissemble, exaggerate and otherwise make false information known so as to gain a bargaining advantage. As my old statistics professor used to say, "Figures don't lie, but liars figure."

All decisions are rational. Two words: George $teinbrenner.

There is perfect freedom of entry to and exit from the market. MLB scores well on this attribute. A team can be a buyer (Yankees, Red Sox, and Dodgers) or a seller (Pirates, Marlins) or an intermittent entrant (Braves) or a sideline sitter. And, a team can move from one category to another at the beginning, the middle, or the end of any season.

Fellow students, the player pool that is controlled by Major League Baseball is not a perfect market and cannot be until there is a salary cap, a minimum payroll, and open free agent auctions.

So for the foreseeable future, fans in some cities will squirm in their seats from year to year; fans in some cities will ride roller coasters; and The Great Rivalry between the Yankees and the Red Sox will continue to destroy the concept of competitive balance.

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