The Market

[Gene Honda Civic]

With the Sox quickly approaching what will, no doubt, be considered an overpriced signing by the baseball community at large, I thought I would post this article I found at USSmariner.

http://ussmariner.com/index.php?p=2130

It's a mariner's site, but this still applies fairly universally.

 

I want to address the issue of market value that seems to be coming up a lot lately. There seems to be a school of thought that MLB is a captialist ideal where each player’s actual value is determined by what the top bidder is willing to pay for his services. The comment “Player X is worth his salary because that’s what the market is.” is idealistic crap. Using a free market ideology to justify huge contracts for non-superstar players is flawed thinking.

 

The baseball market is a zero sum game. Because the 30 franchises each have 25 roster spots, all major league players are competing for one of 750 jobs. Every time a player who is not one of the 750 best available gets a job, someone gets bumped to Triple-A who has major league skills. Financially, it works the same way. MLB as an entity spends about $3.1 billion per year on player salaries. Those dollars aren’t evenly distributed throughout the franchises, however, that is still the total pie that must be divided 750 ways.

 

A player’s actual value, of course, comes from his performance on the field. In a perfect market, the best players would get the most money and it would continue on down to the fringe major league types making the league minimum. However, as we all know, MLB is not a perfect market. There are inefficincies that can be exploited for a competitive advantage.

 

The late Doug Pappas invented a system he called Marginal Wins, which basically holds that a team of players making the league minimum plucked out of Triple-A could win about 50 games in a season. Therefore, what teams are actually paying for are wins above 50, the theoretical replacement level performance of a team of fringe players. He published a slew of essays for Baseball Prospectus on the topic, and they’re worth reading if you haven’t already. I’ll skip the details and just move on to the summary, for brevity sake.

 

Essentially, most winning teams pay approximately $1.5-$2 million per Marginal Win as a whole (the 2004 Mariners paid about $5 million per marginal win). If you have a higher payroll, you can afford to pay a bit more for the marginal wins to reduce risk. A team like Tampa may have a good marginal win/dollar ratio, but that’s because they haven’t spent enough to be competitive. The goal, obviously, is wins, not optimal win/dollar spending. However, a team that spends its money efficiently is going to win more than a team that doesn’t, given equal payrolls.

 

This is the problem a lot of us have with the signings of players like Delgado, Sexson, Koskie, Glaus, Ortiz, Wright, Pavano, Vizquel, etc… The market in the 2004 free agent period is severely out of touch with intelligent spending. The difference in performance between most of the free agents and what can be obtained for a fraction of the cost simply does not support the dollars being paid out to these players. The middle class of baseball has become extremely overpriced.

 

Because of the way the system is setup for players who do not have service time to qualify for 5th year arbitration or free agency, the big values among the players belong to that group. It is a unique advantage for a team to get premium performance for small dollar amounts, giving themselves the ability to spend a bulk of their payroll on star players. However, a weird reaction to the Alex Rodriguez contract has caused the price of superstar players to fall while shifting that surplus money to average or slightly above average players. This is a market inefficiency and one that can be exploited.

 

Currently, the optimal roster construction would be a collection of highly paid, elite players surrounded by a roster of pre-arbitration eligible role players. The system is designed to reward teams who develop prodcutive players from within the organization. Attempting to build a roster through free agency, paying “what the market will bear", is a great way to spend a lot of money on a bad team.

 

People criticize us for saying that we can never be pleased, no matter how good a player the Mariners sign. This is pretty obviously not true, as the feed on Saturday will be one giant party if Adrian Beltre is signed by then. However, it goes to a point; the Mariners have consistently struggled at filling out the roster from the two tiers of players that return value; unique superstar talents that cannot be replaced and homegrown players producing in their pre-arbitration seasons.

 

Spending $12 million per season on Richie Sexson simply continues that tradition. Even ignoring the risks surrounding his injury (which is fool hardy, but is another post all together), his expected performance from 30-33 will not put him in the superstar elite class. He’s going to be a good player making great player money, returning less marginal wins than should be expected from a player with his contract.

 

I realize a large majority of the fan base are just happy that we’re spending money. However, unspent money still has value. The choices are not Free Agent A or Free Agent B for whatever the top bidder is willing to pay. There are hundreds of options available, and limiting ourselves to a Sexson/Delgado comparison is missing the big picture.

emphasis is mine.

 

The point is that teams would probaby(it can't really be proved yet without the top Boras guys signed) be better off overpaying for superstars, who will bring more wins, than overpaying for the abundance of middling talent out there.

 

Pedro @ 13M is a bargain vs. Clement @ 10M --- Pedro has never had a below average season, and his worst season in recent years last year was still better than Clements best. Pedro has an amazing career ERA+ of 167 compared to Clement's below average 98 -- Pavano got $10M for being exactly average over the course of his career. -- Jaret Wright got 21M over 3 seasons for being well under average on his career. These are guys who are performing on the same level as Jon Garland.

 

There is a good discussion about the entry if you follow the link I included at the top.

[Hatchetman]

Don't disagree with the main idea, but Pedro only got $13 mil because last year he was unpedroesque and there's serious concern his arm is going to fall off. Pedro of old would probably get $18 mil or more.

[CanOfCorn]

Great article. The only thing I see that could be wrong is the homegrown talent. Sometimes it takes awhile to find the pre-arb talent to fit into the team. For every Rowand, there are three Borchards. Sweeney may be awesome or not. The Sox, in particular, has had a boatload of AAAA pitchers. And AAA+ position players. Spending a lot on a few "superstar" players is a great idea, but you need a fantastic scouting dept. for the pre-arbs.

[Gene Honda Civic]

Great article.  The only thing I see that could be wrong is the homegrown talent.  Sometimes it takes awhile to find the pre-arb talent to fit into the team.  For every Rowand, there are three Borchards.  Sweeney may be awesome or not.  The Sox, in particular, has had a boatload of AAAA pitchers.  And AAA+ position players.  Spending a lot on a few "superstar" players is a great idea, but you need a fantastic scouting dept. for the pre-arbs.

True. Idealy you'd have your guys come up to the bigs and contribute at a high level right away. THen you could sign them, with confidence, to long term deals before they reached arbitration eligibility. This is essentially what Oakland was able to do with the big three. Their position players took longer to develop though, and they had to go through the process of arbitration, and then free agency. If the Twins only had a little bit more money, they would be a model of this system also.