Free Agent Market Madness

The simple fact of the matter is, right now, it'd be smart for Billy Beane, in a strict business sense, not to sign any free agents. Yes, we could use a bump up in the rotation, and we could certainly use some power hitting, but if it costs you $100m to get it, is the return ever going to be worth it?

That said, the pressure will be on Billy to make just such a move. If anyone can resist that pressure, it's him, being as he's a part owner of the team and the least likely GM to get fired in the entire league - but there's still pressure to do it.

Now, imagine the pressure in Chicago, or Detroit, or St Louis. Imagine the pressure on the Braves and the Mariners. Their local press and fans DEMAND that they get into that loaded market and set some Benjis free.

In strict market terms, Detroit doesn't need free agents. They're good for the next three seasons. But they'll get them, because now there's expectations involved, and a GM that doesn't feed the expectation machine is usually a GM looked down upon for 'not doing his job.'

But just going out to get free agents is not a guarantee of wins, because every team is in different circumstances.

Let's examine Florida and Tampa Bay for a moment. Both struggle to get fans, despite good-sized population bases. Both have low payrolls. Both get no love from the press. Both have, at best, absentee owners (and at worst, Cameron Diaz in Major League). Both have young teams and rely heavily on developing talent - then either using it, or trading it for vets.

Yet Florida has won a couple of World Series and Tampa can't get near the playoffs. Why?

1. Divisional imbalance. To get to the playoffs, Tampa has to be better than the Blue Jays, Red Sox, Orioles and Yankees, who load up their teams with expensive free agents. That doesn't mean those teams get to the playoffs more than the Braves, because they're beating each other to death with those FAs, and not Atlanta. But seriously, how is Tampa supposed to unearth a DH among their kids that can match up to a DH from Boston or New York?

Meanwhile, Florida has to only get past the ever-present Braves, the sometimes hot, most times not Mets, the never-present Phillies and the dying flounder that is Washington/Montreal to get a playoff spot. And from there, it's a crapshoot.

2. History. If you're a free agent and you can choose to go either to Florida or Tampa (rough choices, granted), you're going to Florida every time, if the money is equal. Because they've been to the Series, they win regardless of reputation of their starting lineup, and they might just move to a new city with a big stadium some time down the road. Tampa never will, and they'll forever be the punching bags of the AL East.

I could go on, but the point is this - strict market pressures (IE: The need to win) don't depend on signing free agents. 'Local market' pressures might. Media pressure might. 'Saving the GM from embarassment' might.

But the market relies only on getting past the guys in your division so you can roll the dice in the playoffs, and free agents, as the Yankees will attest to, don't roll dice much better than kids.

In the larger economic sense, baseball players are entertainers. Baseball talent per se isn't an economic skill; it's not like you can go out in the fields, hit a bunch of home runs, then bring them back into town to sell at the market. If you're a baseball player you're marketable only to an organization prepared to showcase you in a spectator sport, and there aren't that many of those, especially at the top talent levels.

As for the teams, we like to think of them as independent competitors in the market, but we tend to confuse sports competition with market competition. Economically, baseball teams aren't in competition with one another at all; they are in competition with other sports, other TV programming, other fashion trends, other things to do on a Sunday afternoon, etc.

Addressing questions of cartel and competition within the league is problematic because in many senses the entire league is the economic unit. One can't treat the franchises as completely independent because their profitability is wholly dependent on being in a league. Suppose, for example, that Steinbrenner gets tired of revenue sharing and takes the Yankees out of the league, then what? He could have a great team, but what would they do? Who would they play? It may seem like a pointless competition sometimes, but if there weren't teams like the Devil Rays to be better than, the Yankees wouldn't have any product to sell.

As for huge salaries to top-of-the-line players, it may seem ridiculous to us, but it's not uncommon for this sort of market. We see it all the time with movie stars, pop singers, etc. In recent decades, improvement in information technology has increased the disparity between the earnings of the top few compared to everyone else. If anything, athletes are at a disadvantage in this, because the market for their product is so constrained. Athletes are dependent on the league system in a way that pop singers and movie stars are not. Someone like Eddie Murphy or Drew Barrymore can tell the studios to buzz off, find his/her own financing, and produce his/her own movies for public consumption. Alex Rodriguez doesn't have that option.

Summary: (1) economically, professional athletes produce entertainment, not sports skills per se; (2) as an entertainment product, the few superstars at the top really are worth that much; (3) the pricing of their contracts is erratic and volatile because the market is never deep or liquid enough to settle down.

By what convoluted formula would overpaying for free agents (and thereby hurting the team for the sake of argument) help a team's bottom line more than fielding a winning team?  Are South Bay luxury box-minded tech companies more likely to empty their coffers for a mediocre but Vernon Wellsful team than for a winning team?

The only way I can see your argument making sense is if it doesn't matter that much what teams do with their roster at all.

If you want to adjust the contracts to their historical equivalent, you could use a traditional macro-economic measure, such as GDP Deflator, CPI, or PPI.  However, if you want to use a better measure, you could adjust the salaries for the percentage of total revenues players receive versus historical averages.  Since this system is nearly closed, then absolute or even adjusted dollar amounts are meaningless.  It is the sharing of the pie that shows the level of overspending.  

The percentage of revenues that goes to player salaries is set in basketball, football, and hockey and helps to control bubbles.  Based on the new CBA and the cash generation of MLBAV, I suspect that this percentage will be no higher in 2007 (+/- 2%) than it was in 2000.  As the new wave of analytically-trained business people continue to purchase major sports teams, this percentage will likely continue to converge as competitive intelligence and analysis takes hold.