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Tuesday, April 20, 2010
Why teams pay equal prices for free agents?
Phil says because we’re already in equilibrium, and so, the cost of any product or service will have the same marginal impact, regardless of who you are.
It’s not just players who are more valuable to the Yankees: it’s everything. Baseball gloves, say. Obviously, Derek Jeter’s glove is more important than Yuniesky Betancourt’s glove: without a glove for Jeter, he can’t play: and the Yankees lose a lot more money with Jeter sitting out gloveless than the Royals do with Betancourt sitting out gloveless. But both teams pay about the same amount for the actual glove. The same is true for everything a team uses: jet fuel, bus service, the food served in the clubhouse after the game, and so on. Why would wins be any different?
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So when will teams choose to buy exactly 1,000 WAR? From the graph, we see that happens when wins cost exactly $4MM each. And so, teams bid up the price of free agents exactly to 4 million dollars.No free agents will go for $3 million a win, because then teams would want to buy 1150 WAR when only 1000 are available, and the price will be bid up. Wins can’t go for $5 million, because then teams would want to buy only 800 WAR when 1000 are available, and the remaining free agents would be knocking down GMs’ doors offering to sign for less.
The equilibrium price, in our example, is $4 million, and that’s what wins will go for.
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But still, it seems weird that every team pays the same amount per win. Aren’t wins worth more to the Phillies than the Royals?
Yes, the *average* win is worth more to the Phillies than the Royals. The *Nth* win is worth more to the Phillies than the Royals. But the *marginal* win is worth almost exactly the same.
It’s probably more accurate to say that the LAST (few) wins purchased is worth almost exactly the same. And since everyone is in equilibrium, then everyone pays the same for whatever is out there.
Works for me. So, a linear wins to dollar multiplier for players. Regardless of how good or bad you are, and regardless of how much a team is worth or not. Wonderful. That’s the drum I’ve been beating, and maybe this is confirmation bias, but it works for me.
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