The Size of the Free Agent Pool and Competition

So, it seems that my post last week on hot stove myths created a bit of a stir. Since this is the case, I’ll devote a post to each of my contentions over the next few days. I’ll begin with the myth that is generating the strongest objections.

The number of free agents at a position affects the price of free agents at a position — It seems logical that more free agents at a position will mean more options for teams. Players act as substitutes and thus a team can pit the players against one another to keep salaries down. The problem with this is that the free agents have come from somewhere. A high number of players looking for new teams means that there is a corresponding number of openings that teams need to fill. For example, it there are four good shortstops on the market this means that there are also four openings on team. The increased supply of players is canceled out by the increased demand by teams needing replacements.

The chief argument against this being a myth is that teams who lose players to free agency do not have to replace them with free agents. Instead, teams can use in-house replacements—from the minors or shuffling the major-league roster—thus, removing available landing spots for free agents on the market. This is certainly true, but it has nothing to do with the number of free agents on the market.

Imagine two free agent markets for shortstops: one with five free agents and one with a single free agent. Let’s further assume that in each market one team replaces its departing shortstop internally. In the former market, there are five players looking to fill four holes. Someone will be left out of the mix, and thus players compete against one bidding down their wages. In the latter market, the free agent has the market all to himself, but no place to go. In a world where the number of free agents is the only factor that affects bargaining power, he should have a monopoly and extract maximum surplus from his employer. Instead, he’ll take the league minimum just to find a bench slot to stay in the league. The five-player market actually provides more bargaining power for players than the single-player market. We could play around with the assumptions all day—fill in all five slots, leave a single slot open in the single-free-agent market—but, the exercise reveals the number of free agents is not important here.

There are two sides to this market and they cannot be viewed separately. Every free agent on the market generates an opening on a major-league team—it has to. And though not every opening must be filled by a free agent, more openings certainly help free agents. If you were to ask a player-agent which market he would prefer to hit, one with a few or one with many suitors, I think the instinctive response would be the one with many openings, because teams would compete for his clients. But, the openings have the side effect of creating competition for his client. In the end, it doesn’t matter. The sides of the market are linked, and this link is rarely mentioned. Alone, the number of free agents or number of teams looking for a free agent seem to tell us something about the competitiveness of the market, when they really don’t.

This leads to my second point: prices for free agents are affected by scarcity in the entire baseball labor market, not just free agents, which is what is important for generating expectations about player salaries. For example, last season had one of the more-plentiful free-agent classes of top starting pitchers in recent years. In any given year C.C. Sabathia, Derek Lowe, or Adam Burnett could have been the top starter on the market, but they all happened to hit free agency at once—Burnett actually opted into the market. If you followed this market you know that the pitchers faced competition not just from each other, but from non-free agents. The Atlanta Braves wanted two of the three and went hard after Burnett and Lowe, landing only Lowe. But this wasn’t the Braves’ only outlet: they tried hard to acquire Jake Peavy and eventually landed Javier Vazquez through a trade. Though Peavy and Vazquez were not free agents, they were available substitutes that were just as important as C.C. Sabathia as competition. And so were many other starting pitchers who were discussed behind closed doors but never switched teams.

What is important for competitive effects on free-agent contracts is the overall scarcity of major-league talent. The free agent market does not exist on its own, rather it is one sector of the labor market where teams purchase their services from among many available substitutes. Top prospects and controlled veterans are just as relevant—though maybe less liquid—to the wages free agents can command as the number competitors offering their services through free agency. An offseason with many similar free agents will not yield lower wages any more than a market with one free agent will yield high wages.

11 Responses “The Size of the Free Agent Pool and Competition”

  1. Mitch says:

    This seems like you’re just being tricky with the words for no reason. Essentially, you’re arguing “Supply doesn’t affect the market. Supply and demand affect the market!”

    Well, yes, of course. But that doesn’t make supply irrelevant. I agree (and think everyone else would as well) the that number of free agents isn’t purely the driving factor, but I feel like everyone already understood what you meant.

  2. J says:

    A.J. Burnett?

  3. Eric M. Van says:

    This is spot-on, and let me give an upcoming example to make the point clear.

    Two years from now, Albert Pujols, Adrian Gonzalez, Prince Fielder, Ryan Howard, Lance Berkman, and Todd Helton should all be free agents. Casey Kothchman, too. Do Helton and Kotchman’s next contracts (that is, whether they can land a starting job) depend in any way on how many of those other guys sign extensions?

    No. Why would it? It depends instead on what Justin Smoak, Chris Carter, Brandon Allen, Brandon Snyder, Ike Davis, Logan Morrison, Freddie Freeman, Yonder Alonso, Lars Anderson et al do in the interim. If most of those guys flame out, Kotchman will land a job. If nearly all pan out, Helton may be out of work.

  4. David says:

    I’m with Mitch on this, if your point is only that Supply isn’t the only factor, then of course you’re right.
    But your language suggests that the number of free agents has no effect, when it does in relation to the number of openings.
    This ‘each free agent opens up a roster spot’ idea distracts from that point, because there are plenty of situations where an FA leaving doesn’t open up a roster spot, but is replaced internally.

  5. Joe says:

    Mitch, he’s saying that not only do supply and demand both affect the market, but supply and demand are positively correlated.

    And if you think that “everyone” understood this already, you should read some more baseball blogs and articles :) Most suggest that a FA market with many FAs for a position will lead to more “bargains”, because of the supply surplus, without paying attention to the demand surplus as well.

  6. RedRobot8 says:

    The problem with that position is that we have a supply glut caused by shifts down the defensive spectrum. The FA market is overloaded with players who would have most value as a DH. A quick look around shows a supply of Jim Thome, Johnny Damon, Hideki Matsui, Vlad Guerrero, and Gary Sheffield against a demand for just one DH (NYY). Some of this excess supply backs up into 1B and LF, but some works to depress the salary that DH FAs should expect.

  7. Brad says:

    I enjoy this analysis. Understanding how the market works and finding the cheapest, most undervalued skill-sets is pivotal for a team’s success, especially if they’re a small market team.

  8. Peter says:

    I think the point is, ‘When evaluating the market for FA’s WRT supply and demand, it’s important to consider the entire market, not just the available FA’s’. Which is undoubtedly true. You may say people already understand this, but more people than you would think commit this fallacy on the internet every day.

  9. Wally says:

    Joe, supply and demand might be possitively correlated, but it isn’t a correlation of 1. Some guys will retire creating roster spots, some guys will enter the league taking away roster spots, FAs are left to fight for the remaining open spots (more or less). All the while teams are left making different choices on all of these factors depending on whether a player is still under contract or is going to be a FA. Meaning you don’t usually bring up a rookie to play SS, when you have a good SS under contract for one more year.

    This year we saw a lot of bad fielding LFers/DHs on the market and Frank Thomas didn’t get a job. Bobby Abreau and Pat Burrell got peanuts compared to what they had been actually worth. So yes, the number of FAs does effect the market. JC is right that it isn’t as simple as “look we can get a great deal on LFers because there are 10 FAs,” but if teams have made choices prepairing for those departures and in general plan to fill from with in the organization, then yeah, maybe you can get a good deal.

  10. Dave says:

    JC, this is just hogwash. Sure, every free agent creates an opening. But another player at his very position might retire, another one might have had a bad year and fallen through, a third one might have gotten hurt and so on. The size of the market for free agents does NOT correlate with the number of free agents!

    Say you are a free agent shortstop. You create one opening. But one other shortstop retires, one stinks and one dies. That opens four spots for only one FA – you!. That would guarantee you the best available contract. But if there were three other shortstops on the market, suddenly four players would compete for the best contract. Granted, there’d be seven openings now, but you might end up with only the fourth best offer.

    Which market would you rather hit?

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