Market Inflation

[Jazz]

In the past 3 years there have been exceedingly more insane contracts being doled out to mediocre players. Its not like years past where the TOP playerss are getting the big bucks, but they are being followed by players like lily, meche, and pierre commanding 10 mil a year when they should no way do so. Can anyone simplify this for my uneducated mind and tell me what to expect in the coming years (and whether or not our payroll will increase accordingly?)

[oldstyle81]

Supply and demand + no salary cap= big paydays

[nilodnayr]

ML salary increases are correlated with proximity to signing the CBA...someone less lazy than me can provide the link.

 

I think in relation to what will happen with the cubs very much depends on the outcome of our season. If we retain Z, we will have about 90M locked up in just a small handful of players in 2009, so it will get interesting if payroll does not increase with baseball inflation.

[LeftCoastCubFan]

1) Baseball was a 1.9 billion industry in 1992. 2.7 billion in 1999. 3.5 billion in 2001 and 2002. It was 5.2 billion in 2006, and is expected to grow more in the near term. New stadiums, local and national tv contracts, advertising, ticket prices have all contributed to this. So the cash is there.

 

2) Revenue sharing and shared revenues have contributed at least 60 or 70 million to small market clubs, before they even include local revenues. More teams competing for players drive the price up.

 

3) Though it had a lowering effect the first few years, the enforcement of the debt rules has made teams more financially sound (cash for players instead of servicing debt). Financially healthy teams have more to spend.

 

4) There have been a lot of unique situations that have teams increasing spending. Cubs after losing people and market share, the Mets the last few years with a new cable company, new owners, new ballparks, etc.

 

5) And then there is ownership insanity. They would never overpay in the industries that made them able to afford to buy a team; yet they fall in love with players and overspend.

[Amazing_Grace]

It's just market forces at work in an artificially closed market (baseball is protected from competition officially by a court decision that exempts it from anti-trust laws and unofficially by tradition in Congress, hence things like steroid hearings).

 

Here's the short version, in terms of player salaries you have supply (players) and demand (teams). To cut a long story very short, if all the teams in MLB spend the same amount of money combined and the supply of players is more or less the same as what it has been previous years, then salaries will remain stable. If teams start spending more money, regardless of the reason, while the supply of players remains constant, salary levels will increase. A few teams have spent a lot more the past couple seasons so salaries have started to go way up again, after being pretty stable for several years after the ARod and Manny contracts.

 

If you want to read the more complicated version of my opinion, here it is.

 

On the demand side, we have MLB teams that pay players for their services. If baseball had complete FA for all players at all times, the total payrolls of all the teams would determine how much is paid to players, and relative performance levels determine who is paid what. In practice, the rules of FA, service time, arbritration, etc., skew the market such that players who are older and have reached free agency will be overpaid and players who are under team control are underpaid. This is a direct result of the fact that baseball is unique in pro sports in that the teams actually pay a vast majority of the cost of player development. A player who is developed for years by the Brewers represents an investment in the form of the money it takes to maintain a minor league system with scouts, players, coaches, etc. Nobody makes any profit off their minor league teams. If the Brewers paid all that money only to have the Yankees sign the guy the season after he got called up, well, we see where whatever slim chance the Brewers have to compete would be altogether destroyed. It's very similar to a drug company that spends billions on a new drug then patents it for rights to its exclusive monopoly manufacture for 20 years. If they got no patent, they'd lose billions because after they developed the drug, anyone could buy a box of pills, see what it's made out of and manufacture it without paying any development costs and drive down the price to where the original developer would not be able to make any money off their investment of billions of dollars in development. In any event, when any of the 30 baseball teams increases their payroll by some amount, it means a greater amount of money is being divided between players and the average salary level will rise. Also, since we're dealing with a closed oligarchical market, the actions of one team affect every other team. The Cubs spending more will mean the Cubs have a greater share of the overall talent level because the talent level is fixed over the short term but payroll isn't. If they lowered payroll, or held it constant while someone else raised payroll, their relative percentage of talent would decline, at least in theory. As an example, this offseason the Cubs increased payroll a lot, and the result was that the Cubs got a greater percentage of the available pool of FA talent than anyone else in baseball.

 

Now for the supply side of the equation, the players. To begin with, a team's roster is 40 man but only about 25-30 of those will have major league contracts, so the "supply" of baseball players will always be about 30x30 players. However, that doesn't tell the whole story as we're not just concerned about having 30x30 warm bodies, but having players that can play well at a MLB level. That's a baseball question, but ultimately, that is determined by the underlying talent level. The supply of talent is affected by lots of things, but basically is determined by the number of athletes capable of performing at a major league level. The more athletes that come into baseball, the more players there will ultimately be. The existence of minor league systems and the combination of HS and college players makes this issue more complicated than football. The MLB teams can themselves have an effect on the supply of talent by making their minor league teams more effective and increasing the talent supply, or letting them fall into chaos and decreasing the talent supply (baseball, until recently when the NFL bought the old world league and formed NFL Europe, wass the only pro sport where the teams have any direct impact on supply). The popularity of baseball also has a profound effect, because as we all know, some children have great athletic ability and some don't. If the talented children choose to play some other sport, then that effectively lessens the talent supply years down the road as the kids grow up. There are also other ways to increase talent supply. In response to lessened popularity, baseball has gone international, drawing talent from Latin America, Japan, Korea, etc. Recent international expansion of the game has increased the talent pool some, but it's been mostly just compensating for the decreasing popularity of baseball as a sport in the US vs. football, basketball, and soccer (don't throw the tomatos I mean kids soccer). We can see how deep the talent pool in football is when guys signed off the street as undrafted FAs such as Kurt Warner become great players.

 

There's not just average level, but distribution of both talent and payroll to consider. Remember that relative talent level determines who gets paid what in pure free agency, which is the case for players with over 6 years of MLB service time. Now there are lots of FAs every year, but not all of them get huge contracts. If the gap between the best players and the worst is wide, the difference between salaries will be larger. If the gap is narrow, then the difference will be narrower. By the same token, the share of that talent that each team has can be wider or narrower, and that is determined by who spends more on payroll relative to the rest of the league. Since homegrown talent players are cheap, everyone has an unlimited supply of these, but most of them aren't very good and for every one that becomes a contributor there are many that don't, so they are more risky from a quality of play standpoint. Since FAs are proven, more consistent, and expensive, more go to the teams that can afford their high salaries. In any given offseason, the top FAs will get the teams willing to spend that offseason bidding competitively, driving up the price. Sometimes in an offseason, the FA class isn't as good. Sometimes it's better. Salaries inflate when there are more teams bidding on whatever players there are, regardless of skill, and deflate when there are fewer.

 

So, to come to the point of my longwinded argument. In recent years, a few teams have markedly increased their spending while most others have remained fairly stable. The Angels, Cubs, and Nationals (remember what it was like when they were in Montreal), have all had fairly significant payroll increases. The Cubs and Angels moving into the 100+M payroll range is extremely significant because it means that these teams are getting big free agents and driving up salaries competing for them. This is one reason Selig complained about the Cubs spending this offseason. One team spending a ton of money of FAs increases the relative salary levels for everyone as a greater amount of money is spent on the same amount of players and having another team pulling all the FAs away from smaller market tems adds to the competitive gap between teams. Yes folks, after this offseason spending spree, the Cubs will definitely belong in the same category as the Red Sox, Mets, Angels, and Dodgers (not the Yankees, they are playing a whole different game).

 

For what it's worth, I have an MBA so I'm not completely unqualified to talk about this stuff. This is my analysis of the MLB market, and it's my opinion about why salaries have gone up recently. Whoever mentioned that salary inflation is timed with the CBA is also correct. Fewer teams will risk spending a lot of money while there's a possible luxury tax or salary cap hanging over them.

Edited March 8, 2007 by Amazing_Grace

[Evers2Tinker2Chance]

Amazin

Nice analysis of the current market, im a bit of a econ nerd myself not MBA level bit college minor

[Soriano12]

It's just market forces at work in an artificially closed market (baseball is protected from competition officially by a court decision that exempts it from anti-trust laws and unofficially by tradition in Congress, hence things like steroid hearings).

 

Here's the short version, in terms of player salaries you have supply (players) and demand (teams). To cut a long story very short, if all the teams in MLB spend the same amount of money combined and the supply of players is more or less the same as what it has been previous years, then salaries will remain stable. If teams start spending more money, regardless of the reason, while the supply of players remains constant, salary levels will increase. A few teams have spent a lot more the past couple seasons so salaries have started to go way up again, after being pretty stable for several years after the ARod and Manny contracts.

 

If you want to read the more complicated version of my opinion, here it is.

 

On the demand side, we have MLB teams that pay players for their services. If baseball had complete FA for all players at all times, the total payrolls of all the teams would determine how much is paid to players, and relative performance levels determine who is paid what. In practice, the rules of FA, service time, arbritration, etc., skew the market such that players who are older and have reached free agency will be overpaid and players who are under team control are underpaid. This is a direct result of the fact that baseball is unique in pro sports in that the teams actually pay a vast majority of the cost of player development. A player who is developed for years by the Brewers represents an investment in the form of the money it takes to maintain a minor league system with scouts, players, coaches, etc. Nobody makes any profit off their minor league teams. If the Brewers paid all that money only to have the Yankees sign the guy the season after he got called up, well, we see where whatever slim chance the Brewers have to compete would be altogether destroyed. It's very similar to a drug company that spends billions on a new drug then patents it for rights to its exclusive monopoly manufacture for 20 years. If they got no patent, they'd lose billions because after they developed the drug, anyone could buy a box of pills, see what it's made out of and manufacture it without paying any development costs and drive down the price to where the original developer would not be able to make any money off their investment of billions of dollars in development. In any event, when any of the 30 baseball teams increases their payroll by some amount, it means a greater amount of money is being divided between players and the average salary level will rise. Also, since we're dealing with a closed oligarchical market, the actions of one team affect every other team. The Cubs spending more will mean the Cubs have a greater share of the overall talent level because the talent level is fixed over the short term but payroll isn't. If they lowered payroll, or held it constant while someone else raised payroll, their relative percentage of talent would decline, at least in theory. As an example, this offseason the Cubs increased payroll a lot, and the result was that the Cubs got a greater percentage of the available pool of FA talent than anyone else in baseball.

 

Now for the supply side of the equation, the players. To begin with, a team's roster is 40 man but only about 25-30 of those will have major league contracts, so the "supply" of baseball players will always be about 25x40 players. However, that doesn't tell the whole story as we're not just concerned about having 25x40 warm bodies, but having players that can play well at a MLB level. That's a baseball question, but ultimately, that is determined by the underlying talent level. The supply of talent is affected by lots of things, but basically is determined by the number of athletes capable of performing at a major league level. The more athletes that come into baseball, the more players there will ultimately be. The existence of minor league systems and the combination of HS and college players makes this issue more complicated than football. The MLB teams can themselves have an effect on the supply of talent by making their minor league teams more effective and increasing the talent supply, or letting them fall into chaos and decreasing the talent supply (baseball, until recently when the NFL bought the old world league and formed NFL Europe, wass the only pro sport where the teams have any direct impact on supply). The popularity of baseball also has a profound effect, because as we all know, some children have great athletic ability and some don't. If the talented children choose to play some other sport, then that effectively lessens the talent supply years down the road as the kids grow up. There are also other ways to increase talent supply. In response to lessened popularity, baseball has gone international, drawing talent from Latin America, Japan, Korea, etc. Recent international expansion of the game has increased the talent pool some, but it's been mostly just compensating for the decreasing popularity of baseball as a sport in the US vs. football, basketball, and soccer (don't throw the tomatos I mean kids soccer). We can see how deep the talent pool in football is when guys signed off the street as undrafted FAs such as Kurt Warner become great players.

 

There's not just average level, but distribution of both talent and payroll to consider. Remember that relative talent level determines who gets paid what in pure free agency, which is the case for players with over 6 years of MLB service time. Now there are lots of FAs every year, but not all of them get huge contracts. If the gap between the best players and the worst is wide, the difference between salaries will be larger. If the gap is narrow, then the difference will be narrower. By the same token, the share of that talent that each team has can be wider or narrower, and that is determined by who spends more on payroll relative to the rest of the league. Since homegrown talent players are cheap, everyone has an unlimited supply of these, but most of them aren't very good and for every one that becomes a contributor there are many that don't, so they are more risky from a quality of play standpoint. Since FAs are proven, more consistent, and expensive, more go to the teams that can afford their high salaries. In any given offseason, the top FAs will get the teams willing to spend that offseason bidding competitively, driving up the price. Sometimes in an offseason, the FA class isn't as good. Sometimes it's better. Salaries inflate when there are more teams bidding on whatever players there are, regardless of skill, and deflate when there are fewer.

 

So, to come to the point of my longwinded argument. In recent years, a few teams have markedly increased their spending while most others have remained fairly stable. The Angels, Cubs, and Nationals (remember what it was like when they were in Montreal), have all had fairly significant payroll increases. The Cubs and Angels moving into the 100+M payroll range is extremely significant because it means that these teams are getting big free agents and driving up salaries competing for them. This is one reason Selig complained about the Cubs spending this offseason. One team spending a ton of money of FAs increases the relative salary levels for everyone as a greater amount of money is spent on the same amount of players and having another team pulling all the FAs away from smaller market tems adds to the competitive gap between teams. Yes folks, after this offseason spending spree, the Cubs will definitely belong in the same category as the Red Sox, Mets, Angels, and Dodgers (not the Yankees, they are playing a whole different game).

 

For what it's worth, I have an MBA so I'm not completely unqualified to talk about this stuff. This is my analysis of the MLB market, and it's my opinion about why salaries have gone up recently. Whoever mentioned that salary inflation is timed with the CBA is also correct. Fewer teams will risk spending a lot of money while there's a possible luxury tax or salary cap hanging over them.

 

Excellent post. Took the words right out of my mouth.