Collusion?

The MLBPA is making noise about filing a grievance regarding collusion in the free-agent market.

“We have concerns about the operation of the post-2009 free agent market,” new union head Michael Weiner said Tuesday in a telephone interview with The Associated Press. “We have been investigating that market. Our investigation is far along but not yet complete.”

The sides reached a standstill agreement last year giving the union additional time to decide whether to proceed with a grievance against teams alleging misconduct after the 2008 season.

Management denies any violation of the collective bargaining agreement, which states clubs may not act in concert with respect to free agents.

“The free-agent market operated in a manner that was completely consistent with the requirements of the basic agreement,” said Rob Manfred, executive vice president of labor relations in the commissioner’s officer. “I feel confident that the MLBPA will come to the same conclusion when they complete their investigation.”

Agents for players, without going into specifics, have claimed they received multiple similar offers for free-agent clients and have pushed the union to contest the practice.

First, let me comment on the notion that players receiving similar offers is evidence of collusion. If owners were conspiring to hold down wages, it is likely that any offers players received—in the 1980s free agents didn’t receive offers at all—will be similar. But what would happen in a perfectly competitive market? We would expect teams to compete against one another and ultimately settle on offers that are roughly equivalent to their projected marginal revenue products. Thus, we would expect teams to be submitting similar offers to players. The evidence that supposedly damns the owners is also consistent with competitive pricing. Just as gasoline prices at different gas stations fluctuate together with petroleum prices, so too does the amount that different teams are willing to pay players according to each player’s financial worth.

Second, in the 1980s, there is no doubt that the owners were colluding, and they were found guilty of colluding in arbitration. At the time Gerald Scully used his marginal revenue product estimation framework to try to determine if there was any collusion. He found that free agents were earning about 70 percent less than their marginal revenue products, and he suspected that collusion was occurring.

I have my own updated Scully-estimates, so I thought I would take a look at the recent free-agent market to see if I can observe any obvious evidence of collusion in recent free-agent signings. I looked at the past two years of free agents who signed major-league contracts and compared them to their estimated marginal revenue products from production in the previous year to the median difference in salaries. For 2008 and 2009 I find that free-agent hitters received salaries that were about 70 percent of their marginal revenue products; there is no difference between years. For pitchers, in 2008 free-agent pitchers received salaries approximately 13 percent more than their marginal revenue products, and in 2009 they received approximately 70 percent more.

Now, these comparisons are rough. They assume that each player is added to an average team, and thus many free agents likely have higher marginal revenue products than I estimated, because the returns to winning are increasing (players added to winning teams are worth more). This may explain in part why on average free-agent pitchers have been earning more than the marginal revenue products. I also believe that the pitchers are a bit overvalued by the market.

Though the numbers are imperfect, I think they convey some interesting information when compared to Scully’s analysis. In the 1980s, when we know collusion was occurring, players were earning significantly less than their marginal revenue products. When compared to today’s players, the difference is striking. I don’t think the MLBPA has much of a data-driven case here.

6 Responses “Collusion?”

  1. Tucker says:

    I think you are completely right but there also may be factors either due to rule changes or market dynamics that reduces the demand for marginal free agents. These might include the rule 5 changes, a recent expansion in the supply of players from Cuba and Asia, and bad teams maintaining payrolls that have not kept up with salary inflation. Also given that the proportion of revenue devoted to payroll hasn’t been dropping overall it’s hard to see the effects of some systematic collusion.

    Given that the marginal free agents getting fewer, smaller, and more uniform offers that were more likely to be minor league deals I would also expect the union to hear complaints and to do it’s due diligence. I think just about the only possibility of a case even existing would be one about one or two players being blacklisted for some reason.

  2. Drew says:

    Isn’t it likely that with increasingly accurate valuation processes teams are more likely to make similar offers based on similar valuation math? I don’t sniff collusion here.

  3. Marc Schneider says:

    I think the agents are getting heat from their clients about the offers and are looking for an excuse. I certainly don’t condone collusion and I think players should get paid what they’re worth, but it’s rather distasteful, to my mind, for baseball players (albeit through their agents)to be complaining in this economic climate about not getting paid enough. Certainly, players capable of playing major league baseball are a scarce commodity and should be well-compensated (and the owners shouldn’t be able to extract rents from the players’ skills), but why can’t these guys relax and enjoy their lives rather than worrying about whether they need $15 million rather than $12 million to live on?

  4. cliff says:

    I am wondering if the excess on starting and relief pitching is being caused by “chaining” or by “universality of need”.

    For Example, there is almost no team in baseball that couldn’t have used John Lackey. they might have been reluctant to guarantee the contract, but he would help them.

    Compare that to (arguably one of the more successful free agents) Chone Figgins. What would the Braves have done with him? Same with the Mets?

    The lack of “buyers” who have a way to use particular position players will result in pitcher’s seeming to get excess compensation.

    And, curious how you correlate position players being “under” at the magic 70% of marginal revenue with pitchers being “over”. Does that suggest collusion on position players only?

  5. JC says:

    Cliff, I don’t know if you can read that much into the numbers beyond comparing them to what Scully found. Because the returns to wins are increasing it’s not easy to tell if pitchers are overpaid.

Trackbacks/Pingbacks

  1. […] J.C. Bradbury goes looking for collusion and finds none. In my opinion, what’s going on is that clubs have better information, so their initial bids are going to be close. It’s probably good for the union to call collusion every once in a while to keep the clubs on their toes and make their members happy, but the chance of it actually happening now seem rather small. […]