On Collusion

The proverbial smoke-filled room

As lotsa teams decline options on players at what would have seemed to be reasonable values at 2019 salary levels the rumblings have already started as to owner collusion.  It is way premature to make any assessments here, but as the resident Braves Journal economist, I want to stake out some ground before events start to turn my ground to quicksand.

  1. Parallel action is not necessarily collusion.  If 30 teams look at the landscape and come to the same conclusions (more or less) about the future, then their parallel actions may look like collusion, but isn’t.  Collusion requires an actual agreement, not an implicit one.  When news comes out about a company and the stock price drops, that’s because everyone independently decided they wouldn’t pay for the stock what they paid yesterday.  They didn’t have an explicit agreement to screw over the current shareholders.  So if owners independently decide that salaries were unsustainable, turning down team options at reasonable 2019 rates may just reflect their sense of where 2021 salaries are headed.  Note that they don’t even have to decide that they think that salaries are too high; all they need to do is think that sufficient numbers of other owners think that.
  2. Operating losses in 2020, whatever they were (and that is a highly uncertain topic) can’t be a cause of reduced salaries except in very special circumstances.  There are few more well-demonstrated propositions in economics than the fact that sunk costs are irrelevant in rational future decisionmaking.  The money lost in 2020 is lost.  Every future decision you make depends only on your future choices and the commitments you have incurred (and the resources that those commitments give you.)  If someone says they have to play the players less because they lost a bunch of money in 2020, they are lying, or irrational.
  3. The Mets are going to be an interesting example here.  The Mets’ new owner didn’t lose a dime on the Mets in 2020 – the Wilpons did.  Even if you grant that there is some deep irrational psychological drive to recoup 2020 losses, Steven Cohen has no such losses.  And at the margins he can move the free agent market all by himself.
  4. Most of the value of sports franchises come from the increase in sales price over time, not the direct annual profit.  The two are related, of course, but not directly.  Past operating losses from one-off events like a pandemic don’t affect the future value of the franchise very much if at all. We see that in the stock market now. People seem puzzled that the market hasn’t dropped more in the pandemic. But the current profits of any company are only a small part of the present discounted value of its profits into the infinite future, which is the basis of stock market price. Only permanent profitability changes will have real impact.
  5. 2021 will see at least the start of negotiations over a new collective bargaining agreement (CBA).  CBAs are odd because they represent explicit, but legal collusion on the part of teams.  Some part of what might look like collusion over salaries or terms of free agents may actual be the entirely legal attempt by the league to establish a bargaining position in negotiations.  This is a quirk in the very complicated field of multiemployer labor law that I’m not qualified to comment on at the moment. Complicating this is the line in every CBA that owners are not supposed to act in concert. But setting a CBA strategy is of course an implicit exception to this.
  6. Demonstrating collusion in the absence of some sort of smoking gun memo is really difficult.  You essentially have to show that teams made a lot of decisions that clearly lowered their profits.  The substantial uncertainties associated with every free agent contract makes that a really hard burden to sustain.
  7. So how did MLBPA demonstrate collusion in 1985-1987?  Mostly from the direct communications by Peter Ueberroth to the owners.  It was argued that telling owners that they were idiots to lose money to get a World Series was more than friendly advice; not only that – it wasn’t even true.  As point (4) above makes clear, short-run losses can easily secure long-term gains.  There was also plenty of evidence that teams didn’t even negotiate with a lot of free agents from other teams.  It’s really difficult to understand why you wouldn’t even try to better your team.  Allegations of collusion regarding Alex Rodriguez and Barry Bonds 15 years later never went anywhere.  The owners learned their lesson.  That’s not to say there isn’t collusion; just that in the absence of coordinating explicit communication, it’s really, really hard to prove.  And worse still, in an atmosphere of mutual distrust, it’s really, really easy to assert, and the advocates on either side actually don’t care about the evidence at all, except as a means to an end.

Author: JonathanF

Alive since 1956. Braves fan since 1966. The first ten years were pretty much wasted. Exiled to Yankees/Mets territory in 1974 --- bearable only with TBS followed by MLB.TV.

18 thoughts on “On Collusion”

  1. Thank you, JonathanF. I enjoy the education you provide.

    C’mon, Hammers. Do something surprising and exciting.

  2. Jonathan, this is really helpful, thanks, particularly as I’m on of the commenters who has probably alleged collision most frequently. I am willing to accept the basic possibility of the null hypothesis – perhaps owners are exclusively signaling to each other about their intentions through entirely legal means of market transactions, rather than coordinating via illegally communications.

    Certainly, I don’t expect collusion to be proven.

    So there’s a rational question: under which circumstances would a profit-maximizing owner feel comfortable lowballing a player he wanted to acquire? Under the circumstances that he had reason to believe that others would act similarly. Otherwise he’d be cutting off his nose to spite his face. If a bunch of owners suddenly feel comfortable lowballing free agents, we can ask, why do they now all feel comfortable? Again, it could be because they’re watching each other do it in public and drawing the clear inference. We don’t know any more than that.

    So I agree, Cohen’s actions will be interesting to watch, though we probably won’t get much feel for him for another couple of years – in my experience, new owners often make a splash then pull back and retrench, like Tom Ricketts, Tom Hicks, and the Miami ownership group.

    We’ll see!

  3. Great article JonathanF! I really appreciate your suggestion on sunk costs as it relates to future spending. That said, I am curious as to your position on perceived future earnings as it relates to declining options and/or signing free agents vis a vis a 2021 budget. If next year looks like it might see the same sunk costs/lack of revenue, would it not be prudent for a company to tighten up monetarily? Asking earnestly because I am no economist and don’t know (hell, I can barely manage my own budget on a good day.)

  4. Great stuff, Jonathan. Thank you so much.

    Really interested to see what the Mets do this offseason.

    I would think that the options being declined are due to the uncertainty for 2021 fan attendance. It’s very possible that we don’t have anywhere near 100% capacity for at least a portion of the season.

  5. Op
    your numbering
    2. operating losses CAN be a reason to reduce offers. A budget for payroll is set based off of (a) how much money do we now have and (b) how much money will we get in as these payments become due. So, if they have lower cash balances, they need (b) to make up for it or they will either (i) reduce payroll or (ii) go insolvent.
    5. As a counterpoint, the whole premise of collective bargaining is that workers should be allowed to collude. If so, wouldn’t it seem a little dicey on ethics to then imply that owners should not be able to do so?

    Nevertheless, a pretty good recitation on multiple economic principles applied to this situation.

  6. Thanks everybody.

    To AL and cliff: I didn’t put a lot of detail here, but as long as firms can borrow money to fund current investment, and the investments are value-enhancing at at least the tax-adjusted interest rate, cash reserves don’t matter all that much. (See why I didn’t go into more detail?) Constraints on borrowing are a big part of the “special circumstances” I elliptically mentioned as an exception. Also see my response to Rob.

    Rob: You’re right. Sunk costs don’t matter, but next year’s profits matter a lot. While Covid losses shouldn’t permanently affect profits, they probably aren’t over either. That alone will cause some optimal belt-tightening.

  7. @6 – So, in other words, it makes some sense outside of collusion that teams may be “discarding dead weight” as it were. Some don’t make sense like Hand in Cleveland (but then again, I can’t make heads or tails out of their operational model anyway.) Some do, however and even O’Day here in Atlanta may fall into that category. Corral the money one needs to take care of those areas one definitely wants to spend on (Freddie’s contract, a big bat or starter, etc.) With the financial uncertainty entering into the 2021 season (that every team will deal with) I think your point #1 above is most instructive.

  8. Players do not collude in collective bargaining: they are represented by a union just as all the owners are represented by a negotiating team.
    When negotiating contracts players operate as individuals as, in theory, do each team. While it would be collusion for a group of players to attempt to bargain as a group, such a thing has never happened in the post-reserve clause era of baseball.

  9. @9: You’re right, snowshine. (Well, it’s collusion in the English sense of the word, but it’s legal collusion.) But there is a fine line between giving orders to a negotiating committee and acting on those orders in common. I don’t think that’s a big deal, but it’s a minor consideration. BTW: I think the notion that Molina and Wainwright would negotiate together was originally meant as a joke, but if they’re doing it for reals, it’s obviously a violation of the CBA. There are fine lines here as well… if Wainwright were to say, “If I can’t keep my catcher, I’ll just stay with St. Louis” that would be fine. If he said, “I’ll only negotiate with the team that signs Molina,” that would be fine. And Molina could do the same vis a vis Wainwright. But you could see that’s a fairly short step to “we negotiate together as a unit” which is obviously illegal. That’s just some of the fine lines involved in multiemployer bargaining situations.

  10. Keith Law had Gausman #16 among free agents, saying “he could be a good fourth starter for almost any club.”

  11. With all the options not picked up, Gausman has surely went down that list.

    With all the options dropped by teams this year, Free Agency is going to be tough for fringe guys and I think we see a record amount of non-tenders this year.

  12. I just don’t think teams have an incentive right now to make financial decisions about these guys, so I do think you’ll see a record amount of non-tenders. Most of these players will be there in January and February when we know more about 2021 attendance. Fans won’t like it, and the people with their yearly suspicions of collusion will be vocal, but until they get a firm commitment on fan attendance, then I think this is a boooooooooring hot stove.

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