The Baseball Way

Posted by on Sunday, February 17, 2019 in Major League Baseball.

Part 1 of Interview with CNBC; Prequel to Labor Market TwistThe GRID. Source: Labor Market Reconsidered.

  1. What would you say is the biggest challenge that Major League Baseball has to face this season from a business/ economical perspective?

There is no quick and easy demand-side fix for the chronic issues of MLB outliving the demographics of its rapidly aging fan base in a new-media steaming fantasy-league driven market for live sports entertainment.

There is evidence to suggest that the pursuit of perfect competitive balance throughout MLB is not necessarily preferred by fans, and that instead there may exist an optimum fan preference for home-grown internal market success over high-rolling big-spending external market free-agent acquisition.

New venue revenue sharing and dynamic/variable ticket price discrimination schemes are being applied across the league to maximize franchise value for highly variable revenue streams over the course of a long season and perennial team talent cycles. Recent competition variance ratios across the AL and NL are as balanced as they have ever been, and over the last few seasons, MLB’s competitive balance is rivaling the random final outcomes of the mighty but mediocre NFL.

Rumors of MLB’s box office demise have been greatly exaggerated. The key to demand side success in MLB’s brave new world lies on the supply side of the players’ labor market and the most effective incentive toward labor market internalization has been the highly progressive luxury tax rate structure under the current 5-year CBA (2017-21).

When left to their own supply side player development devices to avoid progressive payroll taxes, traditionally high-flying large-market clubs have now followed the more financially efficient money-ball supply-side success of the financially strapped mid-market clubs.

The MLB economic challenge in 2019 is not so much how to beat the mighty NY Bombers as how to now beat the home-grown “Baby Bombers.” The troubling tanking epidemic spreading through MLB is really more of a natural internalization of an efficient labor market where player compensation accurately reflects player development, performance and bottom line production.

  1. How has the use of sabermetrics compromised baseball? How has sabermetrics negatively affected baseball? Especially when you consider pace of play, strike out percentages increasing and now free agency having a lackluster off season?

Sabermetrics and money-ball tactics are tools used to advance a long-term statistical strategy. Like any tool these statistical techniques can be overused in the search of short-run quick-fix outcomes. In the final analysis, the old-school baseball way will prevail in combination with new-school analytics and lead to the most efficient outcome, if the labor market for baseball talent is efficient.

Don’t shoot the messenger. The use of advanced baseball analytics has not compromised baseball as much it as revealed a total lack of precision in the match of player contract terms at the bottom line and quality of baseball played between the lines. Baseball’s current problems are derived from an MLB labor market that has been inefficiently cross-segmented three arbitrary seniority groups since the inception of free-agency in 1976.

As artificially constructed, baseball players labor market has been cross-segmented into three tiers of experience: Tier 1 (T1) = 0-2 years of service for players who are effectively controlled under a vestige of the former MLB player reserve system, Tier 2 (T2) = 3-5 years of service for arbitration eligible players, and Tier 3 (T3) players with 6 full years of MLB service  are free agents. On average T1 players are paid the minimum MLB salary which is roughly one-third of their marginal revenue product ($WAR), T2 players are paid about two-thirds of their MRP and T3 is paid about a third more than MRP or $WAR.

Underpayment in Tier 1 is justified economically as player development cost recovery (which has shifted to NCAA in the last decade). Over-payment in Tier 3 is the systematic outcome of the artificial limitation of the number of players eligible for free agency.

MLB teams have one buyer (monopsony) power of exploitation of players under their control in T1 and T2, which switches after 6 seasons to one seller (monopoly) power of free agent players over the clubs in Tier 3. In a free agent auction the winning bid systematically pays the player the highest estimate of his value rather than the most accurate estimate.

The internal market solution to competition is when mid-market clubs develop their own bargain underpaid (exploited) talent in Tier 1 and 2 and release their systematically overpaid talent in T3. Baseball’s current “tanking problem” occurs when large market clubs adopt the same efficient internalization strategy followed by mid-market clubs over the course of MLB’s 8-10 year talent cycle.

  1. What do the 2019 and 2018 off seasons tell consumers and baseball players about the path free agency is heading? Are the days of the 10 year contract over?

We are experiencing the de facto end of Tier 3 free agency as we have known it since 1976. The days of the inefficient ten-year contract are toast.

  1. Is baseball hurting from Harper and Machado not signing or is it creating more consumer intrigue?

As the labor market is currently constructed, Harper and Machado are simply not worth the risk. Fans in all markets regardless of size prefer home-grown talent. Large market price setters burned in the past by the winner’s curse of inefficient free-agent signings are gradually adopting the passive wait and see price taking attitudes of the mid-market clubs of the present.

  1. How can the MLB become more engaging, particularly with consumers of younger generations?

Build a winning team the home-grown baseball way, and they will come.

  1. Do you think a strike is in the cards for the player’s association if they feel that they are being colluded against?

The MLB solution is relatively simple. Teams are not necessarily colluding if they are all following the efficient price signals of the market particularly in the free agent Tier 3. It is probably time to reconsider the artificially segmented labor market for MLB players under the current reality of the baseball world.

Set the seniority requirement for free agent eligibility at four years of MLB service instead of six. MLB clubs can still recover player development costs and the price and terms of T3 free agent contracts will move toward their true and efficient market value. 

Comments are closed.

Back Home   

Sports Econ Blog

V-Man Power Rankings

Chumpzilla Challenge

Sports Econ Publications

League Financials

Sports Econ Reference

Forbes Franchise Values

Salary Caps

Sports Econ Classics