Auction Theory and Trade Analysis

Did the Tigers get screwed on the Infante-Sanchez deal? Is Dave Dombrowski a flaming idiot for not getting the bargains that the White Sox and Dodgers have this July? Auction theory may help us find an answer to these questions.

There are very smart people out there who make their livings analyzing auctions and developing new variants. This is not going to be a primer on auction theory, but I will bring up a few key points that these very smart people have noted and how they apply to trade and free agent markets in baseball – since these are much more like auctions than like any ordinary market for a good or service. The assumptions to bear in mind for auction theory is that – in a baseball context – every organization can assign a value to any player they would like to have either in terms or dollars or prospects, but nobody else knows exactly what that value is.

You don’t need to pay what the guy is worth to you – just a little more than he is worth to the next highest bidder.

Adding a bidder tends to drive the price up – even if that bidder doesn’t win. Taking a bidder away has the opposite effect.

When a bunch of similar or identical lots are auctioned off, the first ones on the block tend to sell for more.

If you bear these simple scientific observations (from guys who watch auction after auction) they can inform your analysis of what happened in trade markets and why and whether one team actually got a raw deal or not. As armchair analysts we’re inclined to look at the trades our team makes [say, Jacob Turner, Rob Brantly & Brian Flynn for Omar Infante & Anibal Sanchez] and compare the price they paid to the prices that other teams paid for their acquisitions to see whether the Tigers (or any other team) got a good deal or a bad one. That’s the easiest way to think about it, but it may not be the best.

When we look at the White Sox acquisition of Francisco Liriano for Eduardo Escobar & Pablo Hernandez or the Dodgers acquisition of Hanley Ramirez for Nathan Eovaldi & Scott McGough in that light we’re assuming that if the Tigers had wished, they could have had Liriano for an Escobar and a Hernandez (were those fungible commodities) or Ramirez for an Eovaldi and a McGough. Experts in auction theory tell us that isn’t the case: nobody other than the White Sox was willing to pay more than Escobar & Hernandez, so the White Sox didn’t have to part with more but we do not know that the White Sox weren’t willing to pay more.

The same would go for Ramirez and any number of other guys that the Tigers made no serious offer on. When we see what seems like an extremely low price, chances are that there is only one serious bidder – one who might want that guy bad, but faces no competition. In that case the bidder of last resort winds up being the players current team, who presumably has at least some use for him. When we have one or few bidders we see a big game of chicken over how much either side really wants the guy, since the range of possible “prices” is potentially enormous for any one player. If everyone knows that the seller is “motivated”, and there isn’t a lot of competition between buyers, you get a virtual freebie like the White Sox Kevin Youkilis pickup. But could the Tigers have had Youkilis for a Brent Lillibridge and a Zach Stewart? No, but if they had made a bid the White Sox would probably have had to pay more.

In this sense, the teams that are “winning” in the trade market aren’t going to tend to be those with cannier GMs. The teams that “win” are just going to be the teams that happen to want guys that nobody else wants or guys with a heavily demanded commodity to sell. Buy low. Sell high. You’ve heard all that before. But just because we can’t look at the prices that other teams paid as a good way to gauge what the Tigers “should have been able to do” doesn’t mean that we can’t glean any important information from other deals with which to critique our local front office.

The kicker is the third point, or rather the intersection between the second and third. If a buyer can afford to wait, the fifth painting by the same artist auctioned on the same day is going to go at a discount. The same goes for starting pitching, and this is why the White Sox appear to have “won” vis a vis Detroit in the deadline race – by paying less. The reason is that each team that acquires a starter is out of the running for any starters still on the block. By the time it came time to deal Liriano, the White Sox may have been bidding mostly against the Twins own desire to keep him. Moving early ensures that there will be more other teams still in the bidding, driving the price higher. The risk, as in free agency, is that caution will probably cost you your first choice. If you need a very rare commodity it simply doesn’t matter that later lots sell for less – there are none. The Tigers may have decided that Omar Infante was such a commodity and that they should be willing to throw caution to the wind. Anibal Sanchez may not have been, but he may have been more of a throw-in than we have imagined.