The Posting Process – Auctions in Baseball
Now that the World Series is over, the thoughts of baseball fans turn to the offseason, the period in which every team attempts to improve through free agent signings or trades. This year, another interesting element of the offseason will come courtesy of Japan’s Nippon Professional Baseball League (NPB), in the form of Japanese-Iranian pitcher Yu Darvish. The 25 year old Darvish currently plays for the Hokkaido Nippon-Ham Fighters, but there is a high likelihood that he will make the transition to Major League Baseball (MLB) this offseason. Interest in his services is sure to be high, as the phenomenal statistics he put up over the last few seasons and his arsenal of major-league quality pitches make many believe he could be among the best pitchers in MLB. However, unlike an amateur player who is subject to the draft, or a typical free agent who may negotiate with any team, the rights to sign Darvish will be awarded to a single major league team through what is known as the posting process.
When a player, such as Darvish, has interest in moving to MLB but is still under contract to an NPB team, that team has the option to post the player. After a player is posted, Major League teams may submit secret bids to the posting team for the right to negotiate a contract with the player, with the highest bidder winning the negotiating rights. If a contract agreement is reached with the player, the Major League team must then pay the amount of their winning bid to the Japanese team that held the player’s rights, but if no agreement can be reached, the posting fee is not paid and the player remains with the NPB team. This amounts to a sealed-bid, first price auction for the rights to sign the player. We can examine this auction in a manner similar to what we have done in class. For a bidding team who values the player’s services at v, not including the actual cost of the contract, the payoff for winning the auction is v – b, where b is the value of the team’s bid. The payoff for losing the auction is 0, as the team gains nothing, but also loses nothing. There is also the third possibility of a team winning the auction but failing to sign the player, in which case the bid is not paid and the payoff is again 0. Given these potential payoffs, bidding truthfully (b = v) is not a good strategy, as the only possible payoff is 0.
Thus the dominant strategy is for a team to bid lower than its actual valuation of the player (b < v), so that a positive payoff v – b may be achieved. The interesting question, however, is how much lower. Is it possible that the NPB teams could be making more profit from the posting fee using a second price auction? Or would a second price system actually benefit the MLB teams who must pay the posting fee? It all depends on teams’ expectations of each others’ bids, since each team would like to win while paying any amount less than v. Thus they should bid the smallest possible amount that they believe will beat all opponents bids, but does not exceed their own valuation v. Thus it is certainly possible that NPB teams are leaving money on the table by not using a second price auction, depending on teams’ expectations of others teams’ bids. It is equally possible, however, that the second price auction would result in smaller posting fees, benefitting MLB teams at the expense of NPB teams.
Recent history suggests that the latter may be the case. In the 2006 to 2007 offseason, another Japanese pitcher, Daisuke Matsuzaka, was posted. The Boston Red Sox won the rights to negotiate a contract with Matsuzaka, with a bid of about $51 million. The second highest bid, by the New York Mets, was believed to be about $39 million. Thus, Matsuzaka’s former team, the Seibu Lions, made about $12 million more than they would have had identical bids been submitted in a second price auction. Though it is likely that bids would have been higher if the auction was a true second price auction, it seems unlikely the increases would have been enough to make up the $12 million difference, as this would represent more than a 30% increase in New York’s bid. In this case, the current system seemed to benefit NPB teams by generating larger posting fees than would otherwise be obtained with a second price auction.
When analyzing the posting system, there is one final consideration that has not yet been discussed here. It is entirely possible for an MLB team to post an extremely high bid, win the auction, and then intentionally not make a legitimate effort to sign the player they just won the rights to. In this case, the NPB team would receive nothing, and the Japanese player would be forced to play for his NPB team in the following season. The purpose of such a strategy would be to block any other MLB team from signing the player. There is no downside to this tactic, as there would be no financial expenditure for the blocking team. Technically, if the use of unfair tactics may be proven, the commissioner of MLB would then have the power to award the winning bid to the next highest bidder, but such a case would be very difficult to prove definitively. Thus far, this strategy has not been utilized, but the amount of Japanese players moving to MLB is expected to increase in coming years, so it will be interesting to observe whether such a tactic will ever be utilized. Certainly, it would have very interesting implications for the use of a sealed bid, first price auction to award player negotiating rights to teams.
Article: http://sports.yahoo.com/mlb/news?slug=jp-passan_yu_darvish_posting_japan_111511