Wednesday, March 26, 2014
Dollars per WAR primer
Matt lays out all the discussion points in an easy-to-read manner. This is an important part:
However, when you sum up the revenue of a 93-win team and divide it by the 45 WAR it takes to get there, you’re averaging in the wins between 48 and 85, which were not the valuable ones. The value of most of the wins was low, but the ones they actually bought on the free-agent market were high value. The market price is the marginal revenue, not average revenue, and baseball wins have an upward-sloping demand curve.
This is where baseball’s unique labor market comes into play. If every player were a free agent every offseason, the dollars per WAR spent undoubtedly would come down. But since players need to wait until they have six years of service time to reach free agency, 70 percent of the league’s total WAR is cost controlled. That means that the average team has about 23 cost-controlled WAR, which puts it at about 71-91 if it eschews all players with six years of service time.
In essence, if you treat the pre-free agents as a known and existing environment, and since there is a "playoff sweet spot" that has a non-linear effect on wins around 85-90, you have this exagerrated pricing on free agent wins.
Suppose though that all players were free agents every year. What would happen? On the one hand, the cost per win would be cut substantially. On the other hand? Well, as you start buying players, a team can make a run for it, overbid for players to corner the market on talent. Why would they do that? Because they want to get to that sweet spot. So, instead of spending 3-4MM$ per win, they'll spend 5MM$ per win, enough to grab themselves a playoff spot. In essence, they are leveraging talented players.
Maybe an analogy is rum and coke. Rum has a certain value and coke has a certain value. But if you can manage to buy both? It has extra value. If you already have a warehouse filled with rum, and there's limited supply of coke, you may overspend on that coke, because you know you can package that to get into a sweetspot.?
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