Cano’s Contract: Supply or Demand?

Jill Harris earned her Ph.D. in economics from Oklahoma State University. She has taught Principles of Microeconomic theory, Economics of Sport, and Economics of Crime for more than 20 years in public and private institutions and is currently teaching at Pitzer College and Pomona College. Her research interests include cheating in the NCAA, detecting the Hot-Hand in sports (especially water polo), and non-compliance behavior in organizations and industry. In this post, Jill examines how both supply and demand come together to determine Robinson Cano’s free agent salary.

It’s a new year; only a few days in and a deal inked in mid December gets some attention in Maury Brown’s latest entry over at Forbes.  There’s more than one Wages of Wins topic to discuss.  Let’s begin with the frequent lament (captured by the quote from Albert Spalding in 1881) that salaries “must come down.”  It does not take a 10-year $240 million dollar contract like Robinson Cano’s to elicit this complaint from the public.  Heck, in San Bernardino County in Southern California—where 9.4 % unemployment still hangs like a fog over the vast valleys in between Palm Springs and Los Angeles–if you make over $100,000 a year you are likely to be lumped in with the group of professionals considered “overpaid.” Brown counters these naysayers with an argument upfront that is built on the increasingly valuable television deals MLB teams enjoy.

Indirectly, Brown is describing a familiar situation to introductory economics students:  an increase in income increases the demand for goods.  In this case, the “goods” are free agents and the increase in income for the teams is fueled by the more lucrative media deals.  The resulting increase in the “price” of free agents is captured by the familiar supply and demand model.  Put simply, the increase in income results in an increase in demand.  That increase in demand pushes up the price of players in the marketplace.

But the story doesn’t end there.  I may be misinterpreting Brown but on the second page of his post he writes “With Extra Money, the Free Agent Pool is Thinning, Thus Driving Up Demand”. This may sound a bit picky, but I am going to argue that Brown’s story isn’t quite right.

In the simple supply and demand model, if the free agent pool is thinning, essentially that means the supply curve shifts to the left.  And yes, that also increases the price of players.  But the big story in this case isn’t demand (as Brown notes), it’s supply.   In sum, Cano’s contract reflects changes in both supply and demand (not just demand)

This may be a matter of semantics; I am pretty sure it is, but economists are pretty demanding (pun intended) when it comes to the language of economics models.

Beyond this issue (which may only be of interest to economists) what does all this have to do with the familiar complaint that professional athletes (or CEO’s for that matter) make too much money?  The answer is in the seemingly innocuous supply and demand model:  the forces of demand and supply determine the price that clears the market.  In Cano’s specific case, the Mariner’s needed a new player to breathe some life into their program and that demand intersected a “thin” supply of free agents.  His contract merely reflects the outcome of a mutually beneficial exchange.

If Spalding were alive today he probably would have tweeted his disgust with Cano’s deal.  I saw more than a few posts suggesting multi-million dollar contracts like Cano’s are indicators of our misplaced priorities as a country.  Yes, $240 million could build a lot of water wells in the developing world.  Why stop there?  Brown reports MLB player salaries totaled $3.7 billion in 2013.  Crazy as it sounds to the uninitiated, many economists might argue the salary figure should be higher—not lower.  After all, as Brown notes, players in baseball receive only 47% of the revenue the league generates.  But, that is the subject of a future post.

- Jill Harris

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