Does Arbitratration Process Solve Monopsonistic Behaviour in Baseball?
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The Park Place Economist Volume 13 Issue 1 Article 11 4-2005 Does Arbitratration Process Solve Monopsonistic Behaviour in Baseball? Andrew Tarman '05 Follow this and additional works at: https://digitalcommons.iwu.edu/parkplace Recommended Citation Tarman '05, Andrew (2005) "Does Arbitratration Process Solve Monopsonistic Behaviour in Baseball?," The Park Place Economist: Vol. 13 Available at: https://digitalcommons.iwu.edu/parkplace/vol13/iss1/11 This Article is protected by copyright and/or related rights. It has been brought to you by Digital Commons @ IWU with permission from the rights-holder(s). You are free to use this material in any way that is permitted by the copyright and related rights legislation that applies to your use. For other uses you need to obtain permission from the rights-holder(s) directly, unless additional rights are indicated by a Creative Commons license in the record and/ or on the work itself. This material has been accepted for inclusion by faculty at Illinois Wesleyan University. For more information, please contact [email protected]. ©Copyright is owned by the author of this document. Does Arbitratration Process Solve Monopsonistic Behaviour in Baseball? Abstract In this paper, I hypothesize that players with less than six years of experience, thus not able to pursue free agency, face monopsony power in terms of their contracts. Furthermore, I believe that players with less than six years of experience have lower salaries than players with the same MRP and more than six years of experience. The arbitration process, I hypothesize, does not rid players with less than six years of experience from monopsonistic behavior. Through this research I hope to measure the impact of monopsony power on baseball players with less than six years of experience to gain a better understanding of the baseball market. This article is available in The Park Place Economist: https://digitalcommons.iwu.edu/parkplace/vol13/iss1/11 Does the Arbitration Process Solve Monopsonistic Behavior in Baseball? Andrew Tarman I. INTRODUCTION with less than six years of experience have lower he market for Major League Baseball(MLB) salaries than players with the same MRP and more has been researched and explored for decades. than six years of experience. The arbitration process, TOne subject of controversy deals with the fair- I hypothesize, does not rid players with less than six ness of the arbitration process. While this process years of experience from monopsonistic behavior. was developed to try to help players receive fair con- Through this research I hope to measure the impact of tracts, a simple question arises: Is this process elim- monopsony power on baseball players with less than inating monopsonistic behavior? six years of experience to gain a better understanding When baseball players sign multimillion dol- of the baseball market. lar contracts, the general public tends to raise an eye- brow and wonder if a single person is worth millions II. ARBITRATION PROCESS of dollars to simply play a game. Fortunately for Before jumping into the literature and models baseball, statistics showing player’s productivity are of baseball, it is imperative to discuss the basic char- easy to measure and readily available. Therefore, acteristics of Major League Baseball. Before base- economic analysis of the baseball market is permissi- ball arbitration began in 1974, players were drafted ble. onto a team and were not able to test their “market Baseball players do not just randomly receive value” by negotiating contracts with other teams. high salaries. Owners Typically, one owner held receive revenue based the rights to a player and on player’s performanc- thus had monopsonistic es, and owners pay play- “All players in baseball are not in a power over him. ers based on these rev- truly competitive market.” Consequently, owners enues. In economic often paid players well terms, owners try to below their marginal rev- measure a player’s marginal revenue product (MRP) enue products (Frederick, 1992). of each player before assessing a salary. In response, players formed the MLB arbitra- In the baseball market, arbitration-eligibles tion process in 1974 to try and regain market power. and free agents try to retain salaries which reflect Final-offer arbitration (FOA), as it is formally their MRP of the previous year. While free agents are known, is set up to give players a chance to increase free to sign with any team in the league, arbitration- their salaries before they are able to file for free eligibles must negotiate with their respective team. agency. Through this process, a player with three to Therefore, all players in baseball are not in a truly six years of experience is eligible for arbitration. If competitive market. they choose to file for arbitration, the player and his In this paper, I hypothesize that players with team file a “bid” for the player’s salary. While the less than six years of experience, thus not able to pur- case is waiting to be heard, negotiations between the sue free agency, face monopsony power in terms of two sides are encouraged. If a negotiation cannot be their contracts. Furthermore, I believe that players developed, a hearing is held, and a neutral third party The Park Place Economist, Volume XIII 21 Andrew Tarman arbitrator will hear each side’s final offer and then further explains in his article, looking at SLG without choose one of the offers (Frederick, 1992). OPS “is like subsisting on food without water” It is safe to assume that “arbitrators act out of (Schwarz, 2004) because both are necessary. self-interest and a desire to keep their positions” Will Irwin (2003) takes another approach to (Frederick, 1992). Since it is important for both play- measure offensive productivity by using a Runs ers and owners to feel that their cases will be handled Created (RC) variable. He argues that this variable fairly, arbitrators should not show favoritism toward “eliminates some of the team bias that is implicit in either side. Since the institution of this process, (offensive) data” (Irwin, 2003). Runs Created, as Dworkin (1981) indicates Irwin indicates, “gives that the final results have one player more credit been even. Of the cases than another when each which have been filed, “It is important for both players run is scored” (Irwin, the results are split and owners to feel that their cases 2003). Therefore, play- between the players and ers are measured for the owners. Experts will be handled fairly.” their offensive produc- believe that, overall, tion to the team. arbitrators have done a Phillip Miller fairly good job balancing the outcome of the arbitra- (2000) conducts both a theoretical and empirical tion cases. comparison of negotiated salaries determined in baseball’s free agent system to those determined in its III. REVIEW OF LITERATURE final-offer arbitration system. In his work, Miller To be able to measure the impact of the arbi- concludes that there is a difference in the salary struc- tration process on player’s salaries, it is first impor- ture for arbitration eligibles and free agent players tant to develop a model to measure player productiv- (Miller, 2000). Also, while he finds out that there is ity. In The Value of Sports Talent, Rodney Fort a significant positive relationship between the (2003) concludes that a general Marginal Revenue salaries of free agents directly affecting the negotiat- Product model is ideal (Fort, 2003). Under this theo- ed salaries of arbitration eligibles, Miller concludes ry, a player’s salary can be determined based on pro- that the systems do not determine equal salaries for ductivity measures of a player (Fort, 2003). players with the same MRP (Miller, 2000). In baseball, different statistics are readily Marburger (1996) uses MRP models to test available to measure player productivity. Andrew salary with respect to years of experience. In his Zimbalist (1992) argues that productivity (PROD), study, he concludes that experience is in fact signifi- also known as OPS, which adds a player’s on-base cant when determining a player’s salary (Marburger, percentage ((hits + walks + hit by pitches)/ (at bats + 1996). Furthermore, he concludes that players with walks + sacrifices + hit by pitches)) and slugging per- more than six years of experience, thus able to freely centage (total bases/at bats), is the best measure of a sign with any team, are subject to salaries closest to hitter’s productivity. At the time, Slugging their marginal revenue products. This supports the Percentage was generally used to measure player pro- notion that the arbitration process does not fully elim- ductivity. However, Zimbalist (1992) believes that inate monopsonistic behavior. while Slugging Percentage “is a good indicator of offensive performance, it excludes one major compo- IV. THEORETICAL FRAMEWORK nent of offensive contribution, walks” (Zimbalist, This study makes use of the human capital 1992). Therefore, OPS should be used because it not theory, which states that players should be compen- only takes into account power statistics, but also sated based on certain productivity measures. Since walks. productivity is possible to measure in baseball, this Alan Schwarz (2004) agrees with Zimbalist theory is applicable to this research. Salary is there- that OPS is the best statistic to measure a hitter’s pro- fore determined by certain productivity measures. ductivity. As Schwarz explains, this statistic “meas- This research also makes use of the monop- ures the key areas of offensive production: getting on sony model. This model is shown in Figure 1. base and advancing runners” (Schwarz, 2004). As he 22 The Park Place Economist, Volume XIII Andrew Tarman FIGURE 1: labor to baseball. W* represents the player’s MRP Monopsony Model which he could expect in the free agent market. If arbitrators have evenly dispersed the number of win- ners between owners and players, the “average” wage would fall between these two constraints.