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.