Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, December 17, 2004

Twins' Arbitration Eligibles.

In other Twins news, the Twins are going to offer pay cuts to some of the arbitration-eligible players. In baseball's arbitration system, around the last week of January, each player who has filed for arbitration, along with his team, makes a so-called "final offer". Then during the next one to three weeks, roughly, the two sides can continue negotiating. If they can't strike a deal, then each side presents its "final offers" to a three-person panel of arbitrators and argues why its offer should be chosen. After they make their cases, the arbitrators render a decision by picking one of the two "final offers" and the two sides are bound to honor the arbitrators' decision.

The final offers aren't really "final" at all because the two sides can continue to negotiate a deal after the setting of "final offers." But that's what this form of arbitration is referred to. The other kind of arbitration, conventional arbitration, is a system in which the arbitrator may pick any settlement that he/she sees fit. This is what's used in hockey.

Arbitrators are thought to have some "preferred settlement" in mind - a settlement that satisfies some objective of the arbitrators. The negotiators have expectations about this preferred settlement, and each sets tits offer to make itself as well off as possible. Then, when rendering a decision, the arbitrators pick that final offer that is closest to their "preferred settlement".

The factors that arbitrators can consider when rendering a decision are precisely spelled out in the Collective Bargaining Agreement. Arbitrators can consider, among other things, "comparable baseball salaries", including free agent salaries. When large contracts get signed in the free agent market, their terms tend to filter back into the arbitration system.

So, assuming that the Twins don't just nontender some of their arbitration eligibles (let them become free agents), the Twins can offer pay cuts. But with the way the free agent market is going, those pay cuts could just possibly push any potential arbitrator to choose a player's offer should the case go to a hearing.