THE COLORADO ROCKIES AND MARKET INEFFICIENCY IN MAJOR LEAGUE BASEBALL A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Andrew J. Grosenbaugh May 2015 THE COLORADO ROCKIES AND MARKET INEFFICIENCY IN MAJOR LEAGUE BASEBALL Andrew J. Grosenbaugh May 2015 Mathematical Economics Abstract The Colorado Rockies play their home games in an environment unlike any other team in Major League Baseball. The altitude effect present in Denver, CO potentially plays a role in why hitters thrive for the Rockies and pitchers struggle. Player’s statistics are altered by playing in Denver, and these performance indicators’ significance diminishes, especially for Rockies players. Statistics are influential in determining player compensation in professional baseball. The statistics of Rockies players, however, are biased because they play 81 home games at high altitude each season. The results of this paper support the notion that the Rockies capitalize on their unique effect by paying players differently than the rest of the league. Keywords: (Baseball, Market Efficiency, Altitude) JEL Codes: (Z22, L83) ON MY HONOR, I HAVE NIETHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature LIST OF ABREVIATIONS BA Batting Average ER Earned Run ERA Earned Run Average HBP Hit By Pitch IBB Intentional Walk IP Inning Pitched IPouts_starter Outs Recorded as a Starter IPouts_reliever Outs Recorded as a Reliever OBP On-Base Percentage OPA Offensive Performance Average PA Plate Appearance RBI Runs Batted In SB Stolen Base SLG, SA Slugging Percentage TBB Total Walks WHIP Walks plus Hits per Inning Pitched TABLE OF CONTENTS ABSTRACT 1 INTRODUCTION........................................................................................ 1 2 LITERATURE REVIEW............................................................................. 2 3 PERFORMANCE VARIABLES................................................................. 7 4 DATA........................................................................................................... 9 Pre-Arbitration Players........................................................................ 9 5 METHODS................................................................................................... 11 Determining a Difference in Denver................................................... 12 Regression Equations.......................................................................... 14 Predicting Expected Salary.................................................................. 15 Comparing Actual vs. Expected Salary............................................... 15 6 RESULTS..................................................................................................... 15 7 CONCLUSIONS.......................................................................................... 18 APPENDIX A................................................................................................. 22 APPENDIX B................................................................................................. 24 APPENDIX C................................................................................................. 25 REFERENCES................................................................................................ 27 Introduction The Colorado Rockies represent an anomaly in the Major League Baseball industry. The 29 other current teams play at an average elevation of 313 ft. above sea level. The Rockies currently play 5197 ft. above sea level at Coors Field which is over 4,000 ft. higher than the next highest stadium. There is plenty of speculation surrounding Rockies players each year linking their success or struggles to the altitude of their home stadium. Currently, there is no publicly available measure to analyze the effect on performance due to high elevation of Denver, Colorado. Evidence suggests that there is a significant effect on player performance in Denver as compared with player performance at any of the other stadiums in the league. Rockies players, who play half of their games in Denver’s “thin air”, are especially subject to the altitude effect. Rockies players face a bias to their statistics which do not accurately measure their true ability. This paper attempts to understand whether or not the Colorado Rockies create a market inefficiency by the way they compensate their players when confronted with the altitude effect. The null hypothesis is that the Rockies do not pay their players any differently than the league standard despite statistically significant evidence to suggest that the altitude effect exists. The alternative hypothesis is that the Rockies pay their players differently than the league standard suggests players should be paid. In this paper, the league standard for a player will be referred to as their market value which is determined by modelling players’ salaries across the league. The results conclude that hitters on the Rockies are underpaid compared to their market value, while pitchers receive salaries which are not significantly different than their market value. Due to the altitude effect, the Rockies are able to leverage their players into deals that may not match their market value or maintain 1 market efficiency. The market for baseball players is efficient when players receive compensation which reflects their true ability. Since the altitude affects performance statistics, the salary for Rockies players’ must be adjusted to maintain market efficiency. The Rockies maintain efficiency in the market for hitters by adjusting their salary from their market value, but they create an inefficient market for pitchers by paying them similarly to the league standard. The paper is organized in the following manner. In Section 2 the literature surrounding the effects of altitude on a baseball, as well as literature pertaining to firms which face unique effects within an industry will be discussed in relation to the altitude effect faced by the Rockies. Section 3 provides an explanation of the performance variables to be used in the regression models for salary. In Section 4 the criteria for data selection is introduced. Section 5 outlines a four-part approach to comparing the actual salary of Rockies players to a league-generated expected salary. In Section 6 the observations of the results are recorded. Finally, Section 7 concludes the findings of the paper. Literature Review The purpose of this section is to first discuss the findings of two articles which conclude that there is a significant effect on the baseball during play that is a result of playing at high altitude. These articles are Park Elevation and Long Ball Flight in Major League Baseball by Bloch, Coe, Ebberson and Sommers (2006) and Atmosphere, Weather, and Baseball: How Much Farther Do Baseballs Really Fly at Denver’s Coors Field by Chambers, Page, and Zaidins (2003).The second portion of this section will analyze the research regarding firms which face uncontrollable micro-economic effects that are 2 unique to the industry. The third segment will discuss the issues of compensation with respect to the labor market, as well as to the baseball industry. Coors Field has long been perceived as a hitter’s park and offensive statistics over the last 10 years support the perception (ESPN Park Factors). Using econometric modeling, Bloch et al. (2006) conclude that the perception is actually a realistic effect which causes fly balls to carry further resulting in more home runs. The authors even go so far as to call Coors Field “a veritable power hitter’s paradise” (Bloch et al. 2006). The advantage of Coors mainly lies in its expansive outfield which is very generous to hitters. However, the significance of the home run figures in the model, and the significantly higher number of them hit at Coors Field imply that there is some force allowing the balls to travel farther. Even the Rockies’ website admits that altitude plays a role in aiding fly balls claiming that batted balls travel “9 percent farther at 5,280 feet than at sea level” (Coors Field History). Much is made of the “hitter’s park”, which implies that the variation in an average hitter’s performance can sometimes be attributed to the venue in which they play. The “thin air” resulting from lower atmospheric pressure at Coors Field increases offensive numbers put up by both the home team and visitors. The Rockies have had their fair share of pitchers struggle in Denver. In their article titled, Atmosphere, Weather and Baseball: How much Farther Do Baseballs Really Fly at Denver’s Coors Field?, Chambers et al. (2003) argue that the Rockies hitters who have thrived during their time in Denver should attribute their success towards the struggles faced by opposing pitchers in addition to their own ability. The authors dispute the claim that objects one mile above sea level will travel approximately 10% further (a generally accepted estimate) than the same object at sea level. Using 3 atmospheric and meteorological research they conclude that the effect is really closer to 6% which can sometimes even be negated by prevailing winds from the northeast during game time (directly into the batter’s face). Regardless, they conclude that there is an effect on the baseball in Denver which is not present at other ballparks due to the high altitude. Their conclusion, however, maintains that the magnitude of the effect is greater on pitchers, who struggle,