MLB Free Agency and Auctions
This article was about how Major League Baseball (MLB) players face so much uncertainty with their contracts during free agency that the rules need to change. While these contracts are guaranteed unlike in other sports, it can be difficult to obtain them in the first place. Owners are stingy with their money and fear overpaying for a player and having an albatross contract on their hands. But with a market value of over $10B, players feel obligated to secure the highest paying contracts they can.
Free agency is where a player is free to sign with any team. Usually, teams bid on a player’s contract and the player chooses the highest paying one. This method indicates that free agency is generally a first-price sealed bid auction. Teams may or may not know what their counterparts are offering for a certain player, hence why it’s a sealed bid. But sometimes, a player will use one team’s bid as leverage to secure a more lucrative bid or equally valuable amenities (ex: a suite at every home game). If teams do know because they hear rumors, then it’s an ascending bid because they can potentially exceed other teams’ bids. As such, free agency can actually be a mix of ascending-bid and first-price sealed bid auctions. It depends on the player’s actions and how he wishes to proceed during his duration of free agency.
As the article suggests, such a method keeps players pleased and entertains fans as they try to guess what their team will do. It also provides incentive to work harder since there’s a high chance of an increased payday. But this philosophy has been changing lately. A player’s past performance suddenly doesn’t allow him to control his market. Teams have become smarter and would rather save their money and acquire cheap, homegrown talent through drafts. The article mentions that draft pick compensation, whereby teams must surrender a top draft pick in exchange for signing a particular player, weighs heavily on players now more than ever. Front office personnel have encouraged the view that a draft pick is more valuable than free agents through the use of data analytics. And the article says that even the best players have to wait all winter before a team is willing to sign.
As a result, players don’t have teams approaching them with lucrative contracts. They have to pitch their case to teams, beginning with an over-market valuation and lowering their demands until a team agrees with them. This method shifts the model of free agency towards a descending-bid auction. This is not financially healthy for players as it requires them to potentially take massive pay cuts. Furthermore, if one player signs at below-market value, it sets a precedent for other teams to continue a descending-bid auction with players who have similar abilities. This snowball effect can last multiple seasons and affect players in different free agency periods. It can also result in teams privately offering only below-market contracts to players in the form of “take it or leave it,” which implies that free agency is partially still a first-price sealed bid since all the teams submit below-market contracts and players are forced to choose between them. And even if rumors leaked about such contract offers, teams then know what the maximum offer is and won’t offer more. Therefore, free agency is now a mix of descending-bid and first-price sealed bid auctions.
The power of free agency is now shifting towards the teams, which is the opposite of its intent — to provide financial freedom to players. Some players fear free agency now and they quickly sign before teams decide that they aren’t worth as much as they are proclaiming, which the article suggests as “panic signing.” A new collective bargaining agreement between the teams and players is clearly a necessity. The uncertainty is now greater than ever.