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Barry Bonds (with bonus Collusion discussion) March 25, 2009

Posted by tomflesher in Academia, Baseball, Economics.
Tags: , , , , , , , , ,
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Sorry about the infrequent updates. It’s a busy time in the semester.

Barry Bonds is, without a doubt, one of the most controversial figures in baseball. He’s currently trying, again, what he tried last year – shopping himself around for the league’s minimum salary. (Thanks to the Sports Law Blog for the link.) Inside, I’d like to briefly discuss collusion and look at the incentives involved with this situation.

Collusion in the economic sense involves an agreement to act inefficiently. To give an oversimplified stock example, suppose a competitive market for chili peppers. That is, there are many people growing chili peppers and many people who want to buy chili peppers. Each bushel of peppers costs about $1 to produce and process from seed to sale. The market is big enough that no one producer or consumer can affect the overall price of the peppers. If one person raises his prices, the others can easily undercut him, and if he wants to sell his peppers he’ll have to meet them. As a result, the sale price approaches the (marginal) cost of production ($1).

Now suppose that only one person grows chilies. They still cost $1 to produce, but the chili monopolist can maximize his profits however he chooses. (The standard assumption is that he’ll set the price equal to marginal revenue, not marginal cost.) If I had made up a demand function and were in the mood to do calculus, I could figure out exactly how many bushels he would produce, what their price would be, and how many fewer bushels that would be than the perfectly competitive market would yield, but the important thing is that monopolies derive more profit than competitive firms, at a cost to the consumer. (Let’s leave aside the idea of a natural monopoly, where high production costs make it more efficient for only one firm to produce.)

So, what’s collusion? Simply, it’s an agreement by two or more firms to act like a monopoly and split the much higher monopoly profits. This is good for the firms and (generally) bad for the consumers because there’s a loss of welfare – some people want the product but at the higher monopoly price they can’t afford it and the monopoly produces fewer goods than the competitive market.

And what does this have to do with Bonds? Consider that Bonds is a producer of runs, and production can be roughly measured by the OPS stat. (There are other methods, but I’ll follow SI’s lead.) Assume that there’s a positive relation between previous OPS and salary (that is, that when negotiating contracts you can put OPS into a formula and that formula will spit out a salary, and that most salaries more or less line up with it), and that Bonds would play either right field or DH, so defense wouldn’t impose an additional cost. A rational team, when offered Bonds’ OPS number for a significantly smaller salary than it would otherwise have to shell out for the same number, should sign Bonds for $400,000. It would be fairly easy to make the leap from this statement of rational behavior to declaring that the teams are behaving irrationally and therefore must be colluding.

SI make a good counterpoint – in economic terms, Bonds’ clubhouse demeanor and notoriety would cause high amounts of negative utility in terms of unhappy and distracted teammates in the first case and customers unwilling to buy tickets to see Bonds in the second. Both of these can affect the profit of the firms and would have to be accounted for in any analysis of the value the team can expect to derive from Bonds. Suppose the most extreme case – that all fans are so disgusted by Bonds that they refuse to attend games he plays in, and that his teammates are so distracted by his attitude that they produce zero runs. In that case Bonds will still be a high producer, but he would still have a decidedly negative effect on profit and on his team’s record.

SI also makes two suggestions I don’t agree with – that Bonds’ felony charges might provide a disincentive in that the team has a high probability of losing him, and that Bonds’ age makes him unattractive. The first assertion ignores the fact that Bonds will still probably produce more than $400,000 worth of runs in a partial season, so in a strict runs-to-salary relation he still represents a net profit. The second doesn’t take into account that at age 42 in 2007 Bonds was worth $15.5 million dollars and that he would have to have declined at an almost impossibly high rate to fail to produce $400,000 worth of runs. Bonds will be out of shape and fragile, but the comparison need not be Bonds now to Bonds in 2007. I’d much rather have an out-of-shape and fragile Barry Bonds as my designated hitter than a $400,000 wet-behind-the-ears rookie. Hell, considering how fragile David Ortiz is, I’d rather take Bonds at $400,000 than Ortiz at his market salary. (The Red Sox could spend the difference on a new fifth starter now that Curt Schilling retired.)

Collusion thus doesn’t make much sense to me in this case, since the incentive to break collusion would be so strong. Stable collusion requires some method for the colluders to punish a fellow colluder who cheats. In a market this would be by simply returning to competitive prices, depriving the undercutter of his excess profits. Here, unless Selig is directly involved (unlikely), there’s no way for the teams to punish anyone for signing Bonds. (Yes, I suppose they could start plunking the batters every time, but that’s not sustainable.) The alternative explanation that makes the most sense to me is the disutility argument – that production and ticket sales will suffer for any team that employs Bonds. If, however, the SI article is correct in its idle suggestion that Bud Selig has ordered teams not to sign Bonds, Selig should be ashamed of himself.

Inexpensive runs
will not placate angry fans.
“Cheap offense” indeed.

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