Will the Giants Repeat as World Series Champions?

This is a guest post by Aaron Garcia of AllSportsTalk.net. Aaron has been blogging about baseball since 2010. His blog is updated daily with the latest sports news and analysis, covering the NBA, NFL, MLB and NCAA Sports.

Fending off 29 other Major League Baseball teams to win the World Series is no easy feat. Doing it twice in a row and three out of the last four years is nearly impossible – but if the San Francisco Giants pull it off, they will be one of only a handful of teams in over 100 years of World Series history to do such a thing. They will have targets on their backs, highlighted with an orange more vibrant and colorful than the orange on their jerseys, which means night in and night out, they will get every single team’s best game. Nothing makes a better benchmark then performance vs. the defending World Series Champs.

So what is the Giants’ plan for the 2013 season? How will they cope with the pressure and stress of defending their championship? Easy. The same way they powered through the playoffs to hoist the trophy, armed only with a team that everyone had written off.

The Giants have talent, make no mistake about that, and they have it in crucial areas. Matt Cain is a solid ace in their starting rotation and Tim Lincecum is a Cy Young award winner, despite his down year in 2012. They have young talent behind the plate in Buster Posey and at third base with Pablo “Kung Fu Panda” Sandoval. But their ability to pump out championships the past few years has been more about their ability to play together as a team, rather than the individual play of their superstars.

Credit manager Bruce Bochy, who has proven that he can manage a roster plagued by injuries, smacked by subpar performances, and jolted with suspensions (See Melky Cabrera’s failed drug test). Through it all, he and the front office have made the right moves at the right times to get the right players in the right spots. The outcome has been nothing short of miraculous.

The National League West, for years, was a laughable division that nobody took seriously. It was said to be a pitcher’s division, and with the exception of Coors Field, no batters embraced the stadiums that dotted the NL West. So while MLB teams like the Los Angeles Dodgers bulked up on home run hitters like Manny Ramirez, Matt Kemp, Adrian Gonzalez and Hanley Ramirez; the Giants went about building a team that could win in just about any ballpark. The Giants championship teams of 2010 and 2012 resembled that of the Anaheim Angels and Chicago White Sox during their most recent championship runs. They filled the bases and came up with clutch hit after clutch hit.

Furthermore, they stuck to the adage that pitching wins championships, and used that philosophy from the starting rotation on down through the middle relievers, setup men and closer. The Giants, when on their game, can outpitch anyone; and that bodes well for them to at least repeat as NL West champs, if not World Series champs again. It won’t be easy, but baseball isn’t a difficult game. When you combine quality pitching with clutch hitting and stick someone at the back end that can slam the door, you’re going to win more games than you lose – and in October, that’s all that matters.

Baseball Game Theory, Signaling, Risk, and Winning by Losing

One of the most publicized parts of economics is the idea of game theory, popularized by Steve Nash and the film A Beautiful Mind. However, although some people understand the basics of this process, there are few that really comprehend how integral it is to business strategy. I am going to take you through a quick understanding of the different types of games in game theory and then provide reasons for how surpluses are distributed as a result of it. I could take for ages on this subject, and I definitely will, but consider this the first in a series of posts that will create the foundation for understanding.

To do this I will cite some authors of game theory; bare with me if you feel a little lost in the beginning as it will all come together in the end. In the simplest form, game theory is the idea that rational individuals will choose the outcomes that they believe will give them the biggest payoff given that their opponent(s) choose based on the same criteria. Hopefully you see the value in my research here and can understand why it took me a couple extra days to get this information up. I’ll be building on it in the future.

It is very true that game theory has its limitations, which will be further explored later, but the realities of its concepts are very real; individuals attach utilities and expected outcomes to future events and often make decisions based on these utilities, regardless of realization (Schniederjans, et al., 2010). Understandably, game theory does suggest economic rationality and there are some limits to the truth of that in the human experience, but in the context of high-level decision makers, or in the case of this paper, General Managers with high-paying, high-scrutinized job titles, decisions are rarely made lightly and without considering many of the possible alternatives. Regardless, there are some limits to perfect information.

But before stepping too far ahead, game theory itself must be examined for the success of these arguments. Simply put, game theory does not necessarily create a set of winners or losers. It is a tool that helps individual groups comprehend how choices can be interdependent (Papayoanou 2010: 5). As Papayoanou explains, “to determine this we need to first understand whether players’ choices can impact the values other players receive from different strategy alternatives; if so, the players’ choices are interdependent and contingent on the choices of others. This is the first condition. If that is true, we then need to ask if the actions we might take could affect the actions that others take, or vice versa. If so, influence issues exist (Papayoanou 2010: 7).”

The original major study of game theory stemmed from the works of von Neumann and Morgenstern’s 1944 volume titled Theory of Games and Economic Behavior (Breslau, 2003). Since then it has developed further, most often shown in the traditional form of a payoff matrix (Breslau, 2003). The game can take up to three forms: competitive games, coordination games, or collaboration games. Coordination games have the potential for a win-win opportunity while deviating from an agreement will result in a lose-lose situation. This is most often characterized by the Battle-Of-The-Sexes game. The payoff matrix is shown below to help illustrate this concept as well as to understand the payoff matrix that characterizes game theory:

(Preston, 2012)

To understand this diagram, consider a couple consisting of a man and a woman that are deciding which event to participate in on their Saturday night. The man prefers baseball while the woman prefers ballet; however, they also gain enjoyment from doing things together. Consider a case in which the man and the woman agree to attend the baseball game. The utilities are shown in the top left box (3,2). The man’s utility gained from attending the baseball game with the woman is shown as the first integer, or three in this case, while the woman’s utility gained from attending the baseball game with the man is shown as the second integer, or two in this case. Alternatively, if they both decided to attend the ballet together, the choice box would be the bottom right, creating the same integers though at reversed numbers. However, now consider that the man and woman decide to each pick the activity they would most prefer, baseball and ballet respectively. If they were to go individually the box chosen would be in the top right, creating utilities of one and one respectively. The bottom left box, which would be the result of illogical decision making, shows no utilities gained (Preston, 2012).

What does this game prove? It shows that the man and the woman gain utility from enjoying each other’s company, but also from doing the activity that each individually enjoys more. In this case there is a win-win scenario by agreeing to both do the same task so that they can be together. Perhaps a type of verbal contract can be communicated in which they agree to attend the baseball game this week and the ballet the following.

Conversely, Collaboration games have the possibility for a win-win but also an incentive to deviate from the original agreement in order to gain an advantage. Consider these games as the reason in which there are binding contracts in business. Perhaps the most notable game in this genre and throughout all of game theory is the Prisoner’s Dilemma. An image is represented below:

(Prisoner’s Dilemma, 2012)

For the sake of brevity, the background of this game suggests that there are two criminals locked in separate rooms without the means of communication. The detective presents each of them with the opportunity to point the finger at the other member in an attempt to get a reduced sentence. However, if they both accuse the other, they will both receive longer sentences than if they had both stayed quiet (Prisoner’s Dilemma, 2012).. The goal of this game is to prove that in almost all cases, both prisoners will choose to accuse the other individual, resulting in an undesirable situation for them both as the gains from staying quiet aren’t enough to compensate for the possibility of the other individual trying to gain an advantage (Breslau, 2003).

Lastly, competitive games are ones in which there is little incentive to work together or in which it is impossible. This is best characterized through the teenager-based game of Chicken, in which two individuals drive their cars at each other and the first person to swerve is considered a “chicken” and noted for their cowardice. In this situation there is clearly a lose-lose scenario, as crashing could not only injure or kill the individuals, but at the very least cause damages to their vehicles. It is impossible to achieve a win-win scenario, as necessarily one of the players must lose (unless both were to swerve at the same time, though for the sake of argument that possibility will be ignored, and it would more likely be considered a lose-lose scenario to the observers) (Papayoanou, 2010).

In reality, very few games fall completely into one category and the examples used above are extreme ones used to create easily identifiable visuals. Regardless, understanding their concepts is a necessity for understanding the rest of my arguments. Ultimately, as seen above, there are essentially five pieces that determine game theory: the key players, the choices available, the sequence in which choices are made, the key uncertainties, and the payoff available to each player in each outcome (Papayoanou, 2010).

Although there is much more information that needs to be conveyed (such as economic rationality, private information, bluffing, mixed strategies, and types of tactics), they will be explored in future posts for the sake of brevity and convenience.

Purpose

In terms of the task at hand, it does not seem to have been explored in substantial depth, which is perhaps surprising given the wealth of data available. Baseball is convenient for a number of reasons in relation to game theory. Firstly, there is over one-hundred years of available statistics and data calculated that can testify to results. Secondly, baseball is a game that is easily understandable and comprehensible by the American audience. As Frederick Mosteller mentions in his work involving statistical valuation of pennant races, “if many reviewers are both knowledgeable about the materials and interested in the findings, they will drive the author crazy with the volume, perceptiveness, and relevance of their suggestions (Mosteller, 1997).” This relevancy makes it much easier to relate and understand the concepts as they are discussed. Finally, baseball is highly media-oriented, which creates the possibility for the utilization of tactics and posturing as well as understanding why not only the actual situations developed, but why alternatives perhaps didn’t.

Today, I only want to look at the idea of surpluses. If you recall, a player can gain a surplus if he gains a contract higher than the minimum he would have been willing to play for. Conversely, a team can gain a surplus if they sign a player to a contract lower than the maximum they would have been willing to pay him. This defines the idea of value.

Given the previous discussion, it is worth exploring why exactly each player does not receive the contract which puts his benefit identical (or at least close) to his cost. Perhaps the most obvious reason is that not all decision makers understand the argument that is being made here and instead choose to value players based on their relativity to other players with similar skill sets that are already signed. Secondly, some of the perfect measuring systems suggested simply do not exist, though part of the beauty of baseball is that there is quite a bit of data to draw on and the future can be at least partially predicted with relative accuracy. Thirdly, and the most important reason, however, is that general managers only want to pay the amount that produces the player so that costs can be reduced and thus profits increased. In short, teams wish to capture the producer surplus.

Although free agency is a competitive game with clear winners and losers, there are some variances in these truths. If it is to be assumed that each team has a limited budget with which to work, teams that don’t actually receive a free agent can “win” by convincing a competitor to pay more for a free agent than was necessary. By doing so, this detracts from the available resources for which them to purchase other free agents. In this way, even by “losing” in a free agent bidding war, a losing team can still somewhat win in the long run. This definitely happens, but there are some benefits to teams working in a collaboration game rather than a pure competitive game. To illustrate this, consider two gas stations located across the street from one another that only sell gas, a commodity with no differentiation abilities and similar operating costs as the business model is almost always identical. It could be possible that the two individuals that operate each gas station simply stand outside and constantly undercut their competitor by a penny in order to draw all the business. Following in this manner, the two would continue to constantly undercut until they reached a point of cutting costs further resulting in negative profits. Ultimately, the consumers would benefit in the lowest possible gasoline prices, but both of the owners would no longer be accruing a profit.

Alternatively, the two business owners could post a reasonable price and simply match one another. This is a form of signaling. By operating in this manner, the two gas station owners are able capture more of the surplus and garner a higher profit. Now although collusion is illegal in the American economy, the requirement for being convicted of such are, at the least, difficult to identify. Since free agency is a repeated game, although there is an incentive to force opposing teams to spend more than necessary, repercussions are likely in this scenario. In this way, the popular “tit for tat” game theory strategy can be employed.

While this explains in part why prices for free agents aren’t completely extreme, since future game costs must always be considered and teams wish to spend as little as possible to capture the player’s talents, there are other parties involved: the player, the agent, and the player’s collective bargaining agreement. The agent, which accrues a percentage of the player’s salary, is clearly incentivized to seek the highest value deal for the player. The collective bargaining agreement is the creation of the unionized Major League Baseball players. As with almost all unions, they seek the best benefits for the groups they represent, which is often based around money. Resultantly, the union often puts pressure on the player to accept the highest offer available to help create benchmarks/precedent of salary for other players that sign later. Lastly, the player himself has specific incentives. An important note of a player is that he is, obviously, a human, and thus gains utility from things besides pure monetary numbers, such as city that he lives in, competitiveness of the team, manager he would be playing under, guaranteed playing time (to parlay into a future contract usually), etc (Fishman, 2003). However, when considering the millions of dollars in play, those reasons would have to create significant utility in order to compensate for more than nominal decreases in salary.

Regardless, the point is that there is a group that is competing to maximize their surplus in comparison to the team’s surplus. Because of this it is understandable that the entire surplus is not captured by either group.

An important last note needs to be made and that is in the context of risk and uncertainty. Often analysts will talk about “money left on the table” by a player who signed with a team before the market developed or before receiving a team’s best offer. This is because people are often risk-averse and realize that there are comparable alternatives to their services, especially if the skills that the player brings are not extraordinary (Papayoanou, 2010). With the very real reality that a contract offer can disappear as team’s move onto other players and utilize their resources elsewhere, players may be tempted to minimize their risk by accepting a contract before they’ve maximized their personal surplus. Similarly, teams may engage in similar behavior, especially in negotiations with imperfect information.

Consider two teams vying for the same free agent left fielder where the next best alternative is significantly less desirable. Avoiding the legality of collusion, the only way that each team can know the amount the alternative team is offering is through information obtained by the agent and information publicly stated or leaked through the media. In this context, consider the power the agent has at commanding the surplus by acting shrewdly: he can suggest to each team that the other team’s offer is larger than theirs and that the only way to secure the free agent is to up the offered contract price. This process could theoretically continue until the surplus that would have been gained by each team is completely eliminated and a larger offer cannot be done.

In reality though, team officials understand the motives of the agent. As such, each team must determine the validity of the statement and how to act accordingly. If, in the situation, the team was to know that the statement that they were outbid was completely false, they would not raise their contract offer. If, in the situation, the team was to know that they were outbid by one million dollars (and they could increase it by still capturing profit), they would likely increase their bid by a million dollars and one penny. However, certainty is ever rarely true. As such, teams must decide how much to minimize their risk in relation to their reward; that is, at what point does increased guarantees of receiving the player reach a point of acceptable risk. As can be imagined, many of the previous questions come into play here: is there a relatively near substitute, will the competitor surpass the team if he is to be acquired there, etc.

Quantifying risk is extremely difficult and understanding the exact threshold which individuals are comfortable with understandably varies, though it is almost always dependent upon perceived payoffs. For now the important understanding is that there is an incentive to minimize risk from both groups and both are willing to pay premiums to acquire it. Note though, that since free agency is a repeated game, there are some incentives to not abuse the capabilities of psychological warfare as a “tit for tat” strategy may be employed.

Hopefully you followed my arguments here – I know I rehashed some previous sentiments but in a different light. I’ll further expand on game theory in the future, but in the end you should have realized from this that 1) Teams often signal to each other to avoid losing profits, 2) Game Theory is an important tool for analyzing potential payoffs and competitor’s moves, 3) That free agency is a repeated game and there are consequences to “annoying” your opponent, and 4) Money left on the table often happens because of an avoidance of risk.

Baseball Rethought.

-Steve

Credit:

Breslau, D. Rationalizing Strategy: Game Theory in Management Pedagogy and Practice, Social Analysis, Vol. 47, No. 1, Spring, 2003, pp. 53-64

DeVault, Ryan C., ”St. Louis Cardinals Prove Value of Winning World Series: A Fan’s Take” http://sports.yahoo.com/mlb/news?slug=ycn-10549655, Retrieved on December 2, 2012.

Fishman, Peter. Competitive Balance and Free Agency in Major League Baseball, The American Economist, Vol. 47, No. 2, Fall, 2003, pp. 86-91

M., Hamaker, J. and Schniederjans, A., Information Technology Investment Decision Making Methodology, (2^nd ed.), World Scientific, Singapore, 2010.

McAfee, Preston, ”Introduction to Economic Analysis” http://catalog.flatworldknowledge.com/bookhub/13?e=mcafee-ch16_s02, Retrieved on December 2, 2012.

Mosteller, F. Lessons from Sports Statistics, The American Statistician, Vol. 51, No. 4, Nov., 1997, pp. 305-310

Papayoanou, P. Game Theory For Business: A Primer in Strategic Gaming, Probabilistic Publishing, New York, 2010.

“Prisoner’s Dilemma” http://www.answers.com/topic/prisoner-s-dilemma, Retrieved on December 2, 2012.

Ruggiero, J., Hadley, L., Ruggiero, G., Knowles, S. A Note on the Pythagorean Theorem of Baseball Production, Managerial and Decision Economics, Vol. 18, No. 4, Jun., 1997, pp. 335-342

Slowinski, Steve, ”What is War?” http://www.fangraphs.com/library/index.php/misc/war/, Retrieved on December 2, 2012.

Shank, Matthew D., Sports Marketing: A Strategic Perspective, (3rd ed.), Pearson Education, Inc., New York, 2009.

Thum, Wendy, ”Who Gets What From Postseason Ticket Revenue” http://www.fangraphs.com/blogs/index.php/who-gets-what-from-postseason-ticket-revenue/ Retrieved on December 2, 2012.

Baseball Hometown Discounts and Recruiting Stars

Today I’d like to combine some human resources and economics knowledge and try to demonstrate why recruiting baseball stars isn’t always the best move. First, it’s important to point out that everybody knows that the “prime years” of baseball are often in the ages 26-31 and can be narrowed down further if you’d like. I realize that stats diminish after that time and that is the primary reason for free agents decreases in skills. However, I’d also like to point out some alternative theories.

The Idea of Hiring Away Stars

Although baseball is often held up to a different pedestal than others, it’s actually got many of the facets of a normal job, but with a much higher acceptance of demotion and an inclusion of constant public opinion. I’d like to point you to an article written by Groysberg, Nanda, & Nohria (2004) titled The Risky Business of Hiring Stars published in the Harvard Business Review. In this article they conducted a study in which they observed top performing research analysts who were in the process of switching companies because they were being lured away by higher pays, not unlike what happens in free agency.

The study confirmed that essentially three things happen. First, the star’s luster fades. The research found that 46% of the analysts did poorly in the year after they had left their previous company for another. Many of the other managers at the firm would refuse to operate with them, often resentful or jealous of their pay and having been sought out. This ultimately hurts the star’s ego. In the end, around 36% of the analysts left their investment banks within 36 months and another 29% in the next 24 months.

Secondly, the group’s performance slips. When a high-flying “star” arrives, there is a tendency towards interpersonal conflicts and a failing of communication within groups. I’m sure you can see how this could affect you in your own personal job – if your employer sought outside help for a position one step higher than you, do you not believe you would take this personally as them suggesting that you were unable to fill that role? This decreases motivation to try to move up the “business chain” since they do not see the opportunity. As a result of that, individuals would often start looking for outside organizations to obtain a leadership position.

Finally, the company’s valuation ended up suffering. Investors would perceive these additions as value-destroying rather than value-adding. Similar to free agency, shareholders would seem to believe that stars often leave firms when they believe they are at their peak and can maximize their returns (in short, they are selling themselves high). Although I’ll admit the main point here is that they believe it is going to decrease profitability for the firm, it is because they believe they are paying too much for the amount of productivity that is going to be provided.

The Point

Now the research does point out that there were a few successful cases which happened when companies drew up detailed plans of how to assimilate these new people into their company and hopefully Major League teams do embark on such a process. However, the point is that stars often underestimate their success being dependent on organization-specific factors. Every team has different resources and capabilities, systems and processes, leadership, internal networks, training, and team-approaches. In essence people have been coming to this type of conclusion for decades, though often through specific things. Think of how often you heard the Cincinnati Reds or the St. Louis Cardinals or the Minnesota Twins or the Los Angeles Dodgers speaking of their “way” in which they train individuals. Think of how often you’ve heard that the reason player X was so successful was because he had player Y hitting behind him or in front of him (the team). Think of how often you’ve heard that the reason player X was so successful was because he was hitting in ballpark Y (systems). Think of how often you’ve heard that the reason player X was so disciplined and given his opportunity was because of the managing style of manager Y (leadership). No, this is perhaps not some drastic conclusion, but perhaps you can take a moment and see how baseball players can relate to “real-life job” personnel.

We can come to the conclusion that it is likely in the best interest for personnel to realize the benefit they receive from playing for the same team. Indeed, the article argues that “few stars would change employers if they understood the degree to which their performance is tied to the company they work for.” Now I can see how it is very easy to see those millions of dollars and come to a conclusion that it’s worth taking a risk in free agency leaving your team, but on the other hand, a slightly more rational individual may choose to remain with his current team if he is not motivated purely by monetary rewards, but also by some intrinsic success. But if we are to come to the conclusion that the team knows that the player knows that some of the benefits he gains are from the team itself, do you not think that they can monetize this? This forms the basis for the idea of hometown discounts as the team is the only one that can offer this specific benefit compared to the market.

Of course there are also other costs, such as the player having to move his children out of school and away from their friends, having to buy/sell a house, having to learn a new city’s best restaurants, etc, and in no way do I intend to minimize this (this leads to the idea of fit, but I have no desire to write on that right now). Instead the point is to realize how these benefits can combine to lead to a significant hometown discount and allow you to understand why players may be more willing to take a below-market rate. Finally, I realize that players and coaches move on and are fired or retire even if a player is to remain with his current team which might mitigate some of those organization-specific benefits. I’d argue that this happens in any organization regardless, but I will submit that turnover is much higher in such a high-profile industry. This may make it slightly less beneficial than say your regular job.

Hopefully you followed my logic here and found this interesting. I’d like to thank Groysberg, B., Nanda, A., & Nohria, N. (2004) for their research into this area. This is one of those things that you can hopefully take into consideration in your own life too.

Baseball Rethought.

-Steve

Credit: Groysberg, B., Nanda, A., & Nohria, N. (2004). The Risky Business of Hiring Stars. Harvard Business Review.

The Announcement of Felix Hernandez’s Contract: How It Should Have Created a Market Rate

Today we are learning that the Felix Hernandez contract is indeed going through – the actual numbers to be announced later. While this is a baseball move that deserves an analytical framework for how it will affect the division, how it will affect market values, and how it will affect the perception of the Mariners in general, the thing that I’m interested in is actually the “preannouncement”, that is, the “slipped” information that came out before the real deal.

A Little Background

If you recall, last Thursday it was reported that the Mariners and ace Felix Hernandez had reached a seven-year $175 million contract. If you then further recall, the Mariners went out of their way to specifically say that they had not finalized any deal and that the claims were without base. Following these statements, reports started to surface of the possibility of there being an elbow issue with the young hurler. Every single news agency then started to show his innings pitched and pitches pitched numbers on big grids to show us the historical context in comparison to other pitchers, pitchers at his age, pitchers who have two arms, pitchers who wear their hats slightly sideways, etc.

Mariners’ GM Jack Zduriencik (who I would like to give an honorable mention to quickly for one of the hardest to spell names ever. Also, fun trivia fact, this is the guy that used to be the director of scouting for the Milwaukee Brewers and is largely credited with repositioning them for their recent competitiveness) has recently shot down all reports that there are any elbow issues with Felix Hernandez. Now, I’m positive that the Mariners did their due diligence with a physical and there is absolutely no chance they would come to such a contract, even if it was only $80 million say, without checking out a pitcher’s arm – to think otherwise is just foolhardy. Is there a possibility that these pitches thrown may contribute to this contract being a potential failure? Absolutely, but that’s for every other baseball blog on the Internet and if you truly care, I’m sure you can find it relatively easily.

The “Preannouncement”

So why am I so interested in this preannouncement of Felix Hernandez’s contract? Well, because of all the things I essentially said above – the public. You have to realize that what basically happened was because of this little “slip up preannouncement choice” the Mariners and Felix were able to get every single public opinion on whether the contract was a good move. This ranged from the people commenting on forum pages to baseball media outlets to the professionals of other baseball organizations. I am positive that Jack himself got a couple calls from other General Managers offering their congratulations. I’m sure Felix got calls from relatives (and long-lost ones) congratulating him as well. In short, both gained, more opinions.

Yes, I’m sure the Mariners have a host of scouts and talent assessors in their organization, but just consider what they gained by having this story out there – the opinions of thousands of individuals. More importantly, they received this information for the marginal cost of…free. The fact that I’m writing about this myself, I realize, is some irony, but I don’t spite them whatsoever for the benefit that they are gaining. Let’s say that, given the contract, every single baseball analyst suggested that the number was way too high (which is perhaps not that far from the truth…honestly, where was the hometown discount here…another topic I’ll someday discuss). Do you think the Mariners would strongly consider decreasing the amount of money to be paid to better reflect market perceptions? I think they would, I mean, at least I would, wouldn’t you? Alternatively, we can look at it from the perspective of Felix Hernandez’s camp; do you think that if he paid attention to what people believed of his “value” in comparison to his contract? Do you believe that if it was truly believed that the Mariners were getting a “steal” that he wouldn’t ask for more money before finalizing it? The point of this is to note that, preannouncements, should, theoretically, completely eliminate producer and consumer surplus to the point where value (taking into account all factors for both sides including risk) is equivalent to a market rate. If you haven’t been reading my other article, remember surplus is the difference between what someone would have paid compared to what they actually paid (or in the case of Felix, what he would have taken compared to what he actually took).

Now a moment of pause here of course – there are costs associated with “moving” a predetermined contract amount from the preannouncement status. Let’s say that there was only a difference of 1%. I realize to the majority of us who will never make millions in our life, 1% of $175M is quite a bit, but in the context of the contract, it isn’t much. Now realize that people aren’t completely rational and that emotions gets in the way – is it worth arguing with Felix, or Felix arguing with the Mariners, over the contract probably being “more fair” if it were 1% either way? Add into the fact that, if say the contract were already mostly drawn up, there would have to be some transactional costs and all that (minimal of course) and just a bit more work, which is theoretically quantifiable as well. The question that should be arising in your minds is – at what percentage is it worth accepting that you might upset the other individual? I’m sure there are a variety of factors that would go into that, personality types being perhaps the most determining, but it would be an interesting question to ponder.

A final realization is important here: the group that believes they would gain the most bargaining power because of public opinion is more likely to be the group that “lets the information slip.” If Felix believes that he was being undervalued and believed the popular opinion would be that he is worth more money, it is in his best interest to let the news slip. He could then point to these public opinions to support his bargaining position. The same goes vice versa for the Mariners.

Nothing extreme here, but definitely some food for thought on what should theoretically happen.

Baseball Rethought.

-Steve

There’s a Benefit to Baseball Competitive Parity

One of the most famous discussions in baseball is the idea of “who has the best rivalry?” As we’re aware, the Red Sox/Yankees rivalry is usually the one receiving the most attention for a variety of factors (similar large market sizes, rich traditions, and a famous Babe Ruth trade). However, there are also smaller ones, such as the Cardinals/Cubs, the Giants/Dodgers, etc. Have you ever wondered what makes up a good rivalry? At the core, the thing that really develops it and makes it sustainable is comparative talent. I’m sure it was relatively palpable the difference in the “rivalry” that existed in this last year in any Red Sox/Yankees game. The same, I could say personally, happened in Brewers/Cubs games, though of course to a lesser effect. In previous years I’d say an average of 60%-70% of the people who came to Miller Park were from Chicago while this last year was more around a much more manageable 40%-50%. Of course those numbers have no scientific basis, but you’ll just have to accept my first-hand account for now.

So what’s the point of this article? This article’s point is simply to argue that there is a benefit to team’s competing at a similar level.

Why?

At the basis of this understanding is an understanding of the finite resource that is stadiums. By definition, stadiums have a limited amount of people that they can hold. Theoretically, they could build stadiums to hold more people, but there are diminishing returns to this possibility. Firstly, the more seats that are added, the farther away some seats have to be from the stadium (either in height or in depth). As someone that has definitely bought the $1 special tickets in the top corner of the stadium, I can tell you that at a certain point you’d much rather just watch the game on your television. In addition, the larger the stadium is, the more land it takes up, both in the actual seats as well as the amount of parking spaces required. At some point the price at which these tickets can be sold does not compensate for these increased costs. This is perhaps why we’ve seen a shift towards more suites in stadiums rather than more seats as they realize that they can charge a higher premium for these that more than compensates for the loss of individual seats.

Now onto an important note, as I reference in my other article, How Much Should Each Baseball Team Spend?, realize that teams split their gate: 60% for the home team and 40% for the opponent. I’m sure you can see where I’m going with this: if nobody attends the game at your opponent’s stadium, there are no gains to be made. In fact, oddly enough, the number one thing any visiting team wants is for the opponent’s stadium to completely sell out. However, as I’m sure we’re all aware, teams that are better, or at least are perceived as better, are more likely correlated to the selling of tickets. An example I like to use for this point is the 2012 Astros who had a home attendance of 1,607,733. Compare that with the 2009 Astros who posted an attendance of 2,521,076 with only a 74-88 record, a difference of 913,343 just for being “not terrible”.

So what’s the conclusion we can come to here? The conclusion is that, there are competing forces at stake in the composition of every team; teams want to make sure they win more games so that they can reach the postseason and appear competitive so that they can sell out their own stadiums (and gain from other profits that relate to winning) while also wanting to make sure they aren’t too far removed from the skill level of their opponents so that they continue to sell out so they can reap the maximum 40% revenues from their stadium capacity.

Thus, contrary to what some fans might think, the Yankees actually want the Red Sox to be good – but just marginally worse than them. However, the Red Sox are also thinking a similar thing – they want the Yankees to be good – but just marginally worse than them. In the end, we have two teams that are constantly trying to be just marginally better than the other to maximize their opponent’s stadium revenues (while also decreasing costs by not spending more than they have to). Ultimately, this should end up with a race of trying to constantly get marginally better than their opponent, resulting in decreased profits for both as they simply keep increasing their costs. Of course, the best thing that they could do would be to collude on a strategy, but as we know, that’s prohibited in the United States.

In the end you have two teams that could theoretically each gain more profits by spending less and taking on strategies that utilize trust rather than competition. However, there is such a large incentive to “cheat” by trying to be just slightly better than your opponent that both teams will choose to cheat every time. This is part of the idea of game theory…but that’s another post in itself.

I hope this got you thinking about the importance of rivalries in baseball. Please feel free to leave your comments below.

Baseball Rethought.

-Steve