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April 27, 2011

Ahead in the Count

Expanded Playoffs, Expanded Salaries

by Matt Swartz

Bud Selig recently admitted that owners and players are likely to reach an agreement to add two teams to the post-season schedule for 2012, allowing an extra wild-card match-up of one or three games to precede the divisional round. This measure may seem like it would result in extra cash for owners—in fact, that has been widely cited as the reason for its inception—but perhaps counterintuitively, it will likely fatten players’ wallets far more.

The size of baseball players’ salaries often come as a shock to people who don't follow sports regularly. Guaranteed contracts worth hundreds of millions of dollars at the high end and league-wide average annual values of three to four million dollars provoke jealousy, disbelief, and heated debates about fairness. The most common response that educated fans can provide as a counterpoint is that Major League Baseball raked in $7 billion in revenue in 2010, which makes it reasonable for the on-field performers to aspire to $3 billion in earnings.

Players did not always garner such a large piece of the revenue pie. Most fans know that before the advent of free agency in the 1970s, player salaries were a pittance when compared with the large sums that clubs generated, but even after the Seitz decision, players did not immediately earn the shares that they have in recent years. In the late 1980s and early 1990s, players earned only about 30 percent of league revenues, but from the mid-1990s through the present day they have taken in roughly 50 percent, and sometimes more.

That change can be traced to a dramatic increase in the monetary value of players. A large contributing factor to this explosion in player value was the introduction of the wild card and a third division winner in each league. More playoff teams meant more playoff games for which tickets could be sold, as well as higher television revenues, but players didn’t simply get paid a share of those proceeds for the sake of equity—the pre-free-agency era debunked that idealistic notion. Players began to get paid hand over fist because of the extra revenue they were bringing in, just like workers in any other profession. Better players get paid more upon reaching free agency because they generate more money for clubs, who bid up salaries in order to get their hands on that extra money. The more wins a player adds, the more money he makes.

The changes to the playoff structure after 1993 made the value of a win higher to teams that actually spent on free agents. It was not simply that more teams made the playoffs—it was that more teams were in the playoff race and more teams were able to see a potential windfall of cash from adding another win to their records. The dollar value of a win is not the same to all teams—it is much higher for those on the playoff bubble, which is why 58 percent of free-agent dollars this offseason were doled out by teams with 86 wins or more in 2010 (despite the Nationals mistakenly categorizing themselves as “competitive” and lowering the ratio). The expected revenue that comes from adding a player is higher than it was before the wild-card era, and teams have bid up player salaries in response.

The value of a win stands to rise still higher if MLB adds an extra playoff round, since there will be more teams on the playoff bubble to bid up salaries of free agents to a level commensurate with the expected revenue gain. With more teams in competitive positions, this additional value will probably be allocated to the players, and I believe that player salaries will increase even more than total revenue as a result.

Consider the marginal effect of a win, which is highest when it makes the difference between reaching the playoffs and not reaching the playoffs. The median gap between the wild-card winner and the wild-card runner-up over the past 15 years was 3.5 wins. As a result, the odds of one game making the difference have been quite high.

By comparison, the average gap between the teams in second and third place in the wild-card standings during the same period was only two games. With those teams even closer to the promised land, the odds of a single game making the difference will spike even higher. Only 27 percent of wild cards in the last 15 years have been decided by a single game, but the second- and third-place finishers have been a single game apart 43 percent of the time.

The main reason for this discrepancy is that the American League wild card has gone to the AL East runner-up in 12 of 16 years. The NL wild-card winners have actually had a median margin of victory of just two wins, while the AL wild-card winners have had a median margin of victory of six wins. This has diminished the value of extra wins to American League teams, but with a second wild-card spot in play, teams in the AL Central and AL West won't necessarily have to outdo an AL East team to secure a playoff berth, which will lead to fiercer competition in auctions for free-agent talent.

Furthermore, the value of a win to AL East teams will increase as well. Since finishing in second place has not led to much lower odds of bringing home a championship (and its associated revenue) than finishing in first place has, the value of a win has not been as high for teams that were likely to get the wild card if they failed to win the division (I’m looking at you, Red Sox and Yankees). Having to play an extra playoff round would change that equation, prompting the beasts of the East to try to add enough wins to ensure a division title.

As teams grasp the benefit of adding players who could potentially improve their playoff chances, as well as the increased cost of letting such players go, bidding on free agents will intensify. With such a sharp increase in the percentage chance of one game meaning the difference between going home and going to October, there is no reason to assume that the total increase in player salaries would be less than the total increase in league revenue stemming from the expanded playoffs.

If the odds of a team finishing one game out of the playoffs come October were to increase from 5.5 to 6.0 percent (a fairly reasonable estimate, if not a conservative one), and approximately one third of the marginal value of a win is attributable to increased playoff odds (also reasonable, if not conservative), then player salaries could be expected to rise by three percent for free agents, which would represent an increase of about $50 million overall. On the other hand, even if MLB added a best-of-three series (which would average 2.5 games in length) to each league, and each game generated an average of $5 million, then total revenue would go up by only $25 million, half of my estimated increase in player salaries.

The players may be asking for concessions in exchange for this extra revenue opportunity, but it is the owners who should be compensated. Although the owners stand to benefit from increased revenue, players will benefit more from an increase in the marginal value of a win, which should wipe out the owners’ potential profits, and then some. Perhaps the owners should ask for more regular-season games instead.

Matt Swartz is an author of Baseball Prospectus. 
Click here to see Matt's other articles. You can contact Matt by clicking here

Related Content:  Wild Card,  The Who,  Salaries,  Second Wild Card

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