What I think I like best about baseball is despite the geometric patterning of the field, the outcome is always in doubt.
What I think I like best about finance and economics is that, despite the Philips Curve and the Kondratieff Long Wave and dozens of related theories, the outcome is always in doubt.
What got me to thinking like this is when I read that that the Nationals (known in some circles as the Natinals) had come to a agreement extending Ryan Zimmerman’s contract. That led me to wonder about other players whose contracts expire at the end of this season. I know, I know -- it is still very early into this season but I can make three fearless predictions so why not jump ahead?
1. The Marlins will not win 100 games.
2. Baltimore will not finish ahead of Tampa Bay.
3. Players and agents will be at odds with general managers over the value they bring to a team and the debate will be widely circulated.
And, I can predict that there will be an irrational free agency season going into 2010. The names available will likely include some significant players, as usual: Jason Bay, Matt Holliday, and Rick Ankiel come to mind. But we are in a Great Recession and a new economy is emerging, so some of the outcomes are in doubt.
A number of players are coming up to their eligibility with relatively cheap club options. Victor Martinez’ $7 million option can be bought out for $250,000 for example. It will cost the White Sox $1 million to not pay Jermaine Dye $12 million and the we train the best and keep the rest Pirates only need $600 thousand to encourage Freddy Sanchez seek his fortune elsewhere.
The outcome I am thinking about, though, is the price elasticity of demand, called PED for short. PED is a measure that economists like to use and that some marketing professionals actually understand. My favorite reader does not like the use of the term, but so far she has not come up with an alternative. Here is how PED works:
In theory, as prices rise, either consumer demand should decline or new suppliers should be induced to enter the market, thus driving down price. However, sometimes the demand curve is not altered by a higher price. The degree to which a demand curve reacts to a change in price is said to be the curve's elasticity. When consumers continue to buy despite price increases, we say that the price is elastic, i.e., it can be stretched. Elasticity varies among products because (this is the part that marketing guys get) there is sufficient brand loyalty to support the higher price. On the other hand, there are goods and services for which there is a price point above which consumers will look for substitutes or do without. Necessity = Elasticity, remains the prime rule.
In baseball’s free agent market, there are only 30 consumers (the teams). In fact, the number is usually lower for any one player. As teams review their rosters and farm systems, they will find themselves declaring certain positions vital, hence certain players, become more of a necessity to those teams than others. Add to that the notion that certain positions are more talent rich than others. A standout like Brian Roberts in the market for second basemen becomes better able to stretch the price than will Jason Bay in a league rich in left fielders.
Up until now, the sellers, the agents, have enjoyed the benefits of demand elasticity and have been driving up free agent prices. Those prices keep increasing but buyers have not retreated in the face of the escalation.
The question is, are their alternatives to competing in the free agent market? And, of course, there are. The most popular alternative is called “grow your own.” Supplement that with a strategic use of the Rule V draft. Add into the mix the ability to trade an established star for a bevy of up and comers and what do you have?
Want an example, consider how the Marlins have created a blue print for avoiding expensive free agency and reducing the tension of the price elasticity of demand while winning 2 world series and playing under the worst lease in baseball.
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