T20 vision
Five things that a cricket auction can teach us about the economy
As cricket has always been a game heavy on statistics, many fans must have enjoyed the number-crunching of the six franchise teams at the player auction of the inaugural SA20 tournament. By the end of the marathon meet on September 19, 80 players – 53 South Africans and 27 internationals – had been sold, with each team having 17 players on their roster (the 80 sold at auction plus the 22 players – including the likes of Kagiso Rabada and Quinton de Kock – that had been pre-sold). Judging by the international interest in the live auction broadcast, South Africa will finally have a T20 tournament that can compare with the best the world has to offer.
An auction is an excellent example of how a market operates. Buyers and sellers compete for an asset by placing bids. And there is only one purpose in acquiring an asset: to yield a return. In other words, in the context of the SA20 auction, franchise owners have only one objective: to choose the best team that can win them the tournament within the available budget.
And that is the first thing that the SA20 auction taught us about the economy: that in a competitive setting, those with specialized skills will be the best remunerated. The most valued player, the South African batsman Tristan Stubbs, was sold for a cool R9.2 million. What makes him so highly prized? Because, in short, he has the unique ability to hit many runs off few balls without needing much time to get set at the crease. At present, this is arguably the most highly valued skill in global T20 cricket. Not many players in the world boast an international T20 average of almost 40 with a strike rate, notably, of above 200. Batsmen that might be considered more household names, like Heinrich Klaasen (R4.5m), Reeza Hendricks (R4.5) or Janneman Malan (R2.7m) sold for less than half that amount simply because others can more easily do what they do.
This is even more true for South Africa’s test cricket captain – Dean Elgar – who went unsold. There simply are too many other players that can do what he does in T20 cricket. The lesson? Those with unique talents in an economy, like those with the enterprise and imagination to start their own firms or those willing to devote years to gain specialized skills, like internal medicine physicians, are likely to earn much more than jobs where substitute workers are easier to find.
The opposite is equally true. There were players with specialised skills – think of David Miller – that opted to be pre-sold. You can bet that Miller will look at the auction prices and wonder what he could have earned in the free market!
But the SA20 auction was also not a perfect laissez-faire market. There were rules that guided buyer behaviour. Every team of eleven players must have at least seven South African players. This is the reason why so many more South Africans were picked and why they also attracted the highest prices (see figure below). Had there been no quota on South Africans, many more overseas players would likely have been purchased.
Price restrictions also affected buyer behaviour. Although there was no price ceiling, meaning there was no maximum price, many players had a price floor, in other words, a minimum or base price. Temba Bavuma, South Africa’s T20 captain, was one of them, with a base price of R850 000. He went unsold. The reason is simple: the market determined that there were other players of similar ability available at lower prices. Had Bavuma had a base price of R175 000, it is very likely he would have been picked up by one of the teams. The lesson? Minimum prices (in this case: wages) can lead to inefficiencies in the market, with those willing to work at lower salaries that reflect their level of productivity not being allowed to do so.
A third lesson is that the market will search for and reward talent that might be hidden from view. In short, it pays the market to find those ‘uncut diamonds’ in the hope that they pay a lower price relative to what the player can deliver on the field. The 26 year-old Evan Jones would be unknown to most cricket fans, yet those following the provincial T20 tournament last year would have seen an explosive hitter playing in Kimberley. An uncut diamond indeed. The Paarl Royals, who picked him up for R1.7m, will hope his performances in the SA20 can match his 30 average and 150 strike rate in T20 games.
A fourth lesson is that some regulation and oversight can make markets more efficient. When the Joburg Super Kings bid for R5.5m for Donovan Ferreira, the Pretoria Capitals immediately raised them to R5.6m. After some confusion, that bid was called null and void, because the higher offer was illegal: if that bid was allowed, the Pretoria Capitals would not have had enough money to fill their 17 slots! Had that not been discovered by those providing oversight, it would have resulted in further delays and frustration later and might have resulted in the collapse of the entire auction. The state does have an important role to play in ensuring that markets run smoothly.
In a competitive market, as stated above, specialized skills are highly prized. Whereas Stubbs earned R9.2 million on the night, 24 players earned the minimum base price of R175 000. Put differently, you can buy 52 players at the base price for one Tristan Stubbs and still have change left. This is reflected in the Gini coefficient of players sold: 0.59 for all players or 0.60 if only South Africans are considered. The figure below plots the two Lorenz curves that show who in the distribution gets what proportion of the total. The Gini for all players (the red line) is also roughly equivalent to the Gini coefficient of South Africa’s income distribution.
What can be done to reduce such high disparities? One policy, some might argue, is a maximum price, a salary cap. What if R3m was the maximum that players could earn? Or think of it as a tax on everything a player makes above R3 million. Surely that would reduce the Gini coefficient without distorting incentives for the players to perform?
Yes, it will indeed reduce the Gini, from 0.6 to 0.5. But it will create at least three problems. First, how will those exceptional players be allocated? In short, would the team getting Tristan Stubbs for R3 million not have a massive advantage over the others who gets a player that is ‘only’ worth R3 million? Second, and more importantly, it might lead to the best players choosing other tournaments over the SA20. Why earn only R3 million in South Africa when another tournament organiser is willing to pay you much higher salaries? Why risk an injury for only R3 million when the Indian Premier League, held only two months later, pays you much more than that? If the top players choose not to play, then the tournament loses its fan interest and so, too, its primary revenue source. Third, if you’re a brilliant 18-year-old sportsman who has to choose between cricket or rugby as a career. What will happen if the wages of one sport have a cap? You’ll more likely choose the other one. The lesson? Attempts to reduce inequality have their merits, but such regulations will also lead to other distortions, especially in our integrated world.
Although cricket will remain a game of statistics, there is little doubt that the new SA20 event and its international allure will also offer vital lessons in economics.
An edited version of this article was first published on News24. Data by Codera Analytics. Photo by Samuel Dedman on Unsplash.