The Price Is Right?
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Torgeir Nesje and Klas Tømmer Ufs ________________________________ T he Price is Right? A study of EPL clubs’ behaviour in the transfer market Masteroppgave i Økonomi og Administrasjon Høgskolen i Oslo og Akershus , Fakultet for samfunnsfag 1 Sammendrag I denne oppgaven har vi studert drivern e bak overganger i moderne fotball. Vi har undersøkt de tre siste sesongene av Engelsk Premier League (EPL), det betyr at seks overgangsvinduer og totalt 301 overganger er inkludert i vårt datasett. Vi har først beskrevet nåværende tilstand i overgangsmarkedet , deretter har vi forsøkt å forklare fotballklubbenes oppførsel igjennom økonomisk teori. Videre har v i test et vårt datasett for hypoteser basert på tidligere studier, økonomisk teori og egne antagelser. Til slutt sammenkobler vi våre resultater med økonomisk teori. Som en interessant avslutning tester vi ut våre estimerte verdier mot reelle verdier for å finne sammenhenger mellom vår beskriv else av markedet og data fra markedet. Våre resultater antyder at de beste spillerne har en forhandlingsmakt som forstyrrer det frie marke d et . Vårt bidrag til tidligere studier på dette feltet er at en spillers “ x - faktor ” , potensiale og suksess i Europa cu p sammenheng er hoved drivere for overgangssum blant spillerkarakteristika . Blant klubbkarakteristika vil klubbens omsetning sterkt påvirke overgangssummen. Klubbenes omsetning vil øke med den nye TV avtalen som blir introdusert i sesongen 2016/2017. Abstract I n this thesis, we have studied the determinants behind transfer fees in modern football. We have investigated the last three seasons of English Premie r League (EPL), meaning six transfer windows and in total 301 transfers are included in our data set. In doing so, we have first described the current state of the transfer market, and then we try to explain the behaviours of football clubs through economic theory. Further, we test our dataset for hypotheses based on previous studies, economic theory and our own assumptions. Lastly, we link our results with economic theory. As an interesting ending, we test out estimated values against real values to find links between our description of the market and data from the market. Our results suggest that the best player s have a bargaining power that disturbs the competitive market. Our contribution to previous studies in this field is that a players’ “x - factor,” potential talent and success in European cup competition are key determinants for transfer fees from player characteristics . While for club characteristics , the level of transfer fees is highly influenced by their financial position. The financial position will strengthens after a new TV deal that is set to be introduced in the season 2016/2017. Høg skolen i Oslo og Akershus , Fakultet for samfunnsfag Oslo 20 15 2 Foreword This thesis is written as the final part of the Master of Science in Business and Administration at Oslo and Akershus University Coll e ge of Applied Sciences. Our lectures recommended us to choose a topic of own choice and interest. We were both above average i nterested in football, and thought valuing of human assets was an interesting issue. Football is the world most popular sport, and transfer fees have always been a discussed topi c. We wanted to find out what was the key determinants of transfer fees in English Premier League. Our analytical major in Finance and Financial Management gave us the framework to address this issue. When estimating through an econometric model like ours there will always be questionable assumption s . Since not all the details around transfers are made public, there is no guarantee for transfer fees to be 100 % accurate. To be consistent we have re trieved all transfer fees from T ransfermarkt. The work hav e been time consuming, extensive and challenging but very interesting and educational. This master thesis is our independent work and should be regarded as such. Any opinions addressed in this thesis are our own. We would like to thank our supervisor, Helg e Nordahl, for helpful guidance and meaningful discussions along the way . Oslo 26.05.2015 Torgeir Nesje and Klas Tømmer Ufs 3 Contents 1 Introduction ................................ ................................ ................................ ................................ ... 5 1.1 Research topic ................................ ................................ ................................ ......................... 6 2 Backgrou nd ................................ ................................ ................................ ................................ .... 7 2.1 TV rights and revenues in EPL ................................ ................................ ............................... 7 2.2 The Bosman ruling ................................ ................................ ................................ .................. 8 2.3 Regulations of the transfer market – Overview UEFA Financial Fair Play (FFP) ............... 9 3 Existing literature ................................ ................................ ................................ ........................ 10 4 The transfer market in an economic perspective ................................ ................................ ........ 13 4.1 Description of the market ................................ ................................ ................................ ...... 13 4.1.1 Football as a product ................................ ................................ ................................ ...... 14 4.1.2 Segmentation of countries ................................ ................................ .............................. 14 4.1.3 Segmentation of the labour market ................................ ................................ ................ 15 4.2 Market structures ................................ ................................ ................................ .................. 16 4.2.1 Properties of the competitive industry ................................ ................................ ........... 16 4.2.2 Perfect competition ................................ ................................ ................................ ......... 17 4.2.3 Monopoly ................................ ................................ ................................ ........................ 17 4.2.4 Natural monopoly ................................ ................................ ................................ ........... 18 4.2.5 Oligopoly and strategic interaction ................................ ................................ ................ 18 4.2.6 Oligopsony ................................ ................................ ................................ ...................... 18 4.2.7 Summarized description of the four market structures in a football persp ective ........ 19 4.3 Explaining transfers of players through economic theory ................................ ................... 19 4.3.1 Opportunity Cost ................................ ................................ ................................ ............ 20 4.3.2 Marginal Utility ................................ ................................ ................................ .............. 20 4.3.3 Pareto optimal solutions ................................ ................................ ................................ 23 4.3.4 Bargaining theory ................................ ................................ ................................ ........... 24 4.4 Where is the rationality? ................................ ................................ ................................ ....... 25 4.4.1 The problems of the difference between value and price ................................ .............. 26 5 Introduction to data ................................ ................................ ................................ ..................... 28 6 Our econometric model of transfer fees ................................ ................................ ...................... 31 6.1 Statistical tests ................................ ................................ ................................ ....................... 31 6.2 Independent variables ................................ ................................ ................................ ........... 32 6.2.1 Player characteristics ................................ ................................ ................................ ..... 32 6.2.2 Club characteristics ................................ ................................ ................................ ........ 34 6.2.3 Others ................................ ................................ ................................ ............................. 34 7 Results ................................ ................................ ................................ ................................ .......... 37 4 8 Discussion and analysis ................................ ................................ ................................ ................ 41 9 Implications and further research ................................ ................................ ............................... 45 10 Conclusion ................................ ................................ ................................ ................................ .. 47 References ................................ ................................ ................................ ................................ ....... 48 Appendix ................................ ................................ ...............................