Economics 101: How Supply and Demand Sets Prices for Saves

Settle down class. Welcome to Economics 101. Today’s lesson will be on supply and demand and how that affects market pricing.

Don’t worry, there won’t be any homework, but we will have a pop quiz in a minute.

We’re going to look at the recent American League and National League LABR (League of Baseball Reality) auctions in terms of a basic economic principle: supply and demand.

Whether they’re written on a piece of paper, stored on a computer program or entrenched within one’s brain, everyone enters an auction with a set of prices to guide their bidding. Conventionally, the sum of the prices matches the total of each team’s budget and exactly enough players are positively priced to fill everyone’s squad with a legal roster.

Those really into the science of player valuation likely have a spreadsheet driven system. One of the considerations when setting this up is how much budget should be allocated to hitting versus pitching. There are many theories why the following is the case, but quite frankly for the scope of this discussion, the reason is moot. What’s important is most auctions of this nature nestle near a 69:31 hitting versus pitching split. That is, when assigning guide prices to the draft-worthy pool, 69 percent of the available budget is distributed among hitters, leaving 31 percent for pitchers.

POP QUIZ #1

 As a group, do you think AL LABR spent less, more or exactly 69 percent of their money on hitters? What about NL LABR?

POP QUIZ #2

Which LABR league do you think spent MORE on hitting, AL or NL?

It never ceases to amaze me how many leagues land on exactly 69 percent. The American League split was exactly 69:31. However, the Senior Circuit participants spent a bit more on hitting as the National League version sported a 71:29 split.

Let’s be honest. How many surmised the AL would spend more on hitting than the NL? I can envision a thought process along the lines of “hitting is better in the American League so more money will be spent on AL hitting while pitching is better in the National League so more money will be spent on NL pitching.”

Intuitively this makes sense but this line of thinking omits the economic principle alluded to earlier, supply and demand. Simply put, when supply exceeds demand, the price drops. When demand exceeds supply, it rises.

The supply of good hitting in the American League exceeds – or at least matches demand. However, in the National League, the demand for solid pitching exceeds supply, so the cost is reduced. Taken together, it now makes more sense that the National League spent more on hitting than the American League since the supply of perceived solid bats was less than demand.

Truth be told, the perception that hitting is better in one league or the other (and the same for pitching) is really a misnomer since everything is relative. The stats of the American League hitters may be better than their National League counterparts (and vice versa for pitchers) but the reality is everything is relative. The best player in each league is the best player in each league. Their stats may be different but usually, in fantasy terms, they’re pretty close to equal. This year is an exception as Mike Trout and Clayton Kershaw project to be in a tier by themselves in their respective leagues. So maybe it’s better to say the average AL hitter will have better real stats than the average NL hitter, but in a fantasy sense, they’re equals.

The thing is, when you’re at the auction table, perception is reality and if the room is paying a premium for NL hitting and not spending as much, relatively speaking on the arms, that’s information you need to pick up to best construct your roster. Let’s take a look at a couple of specific areas to see if we can’t apply the supply and demand principle on a more micro level.

Anecdotally, the bullpen situations in the American and National Leagues are night and day. To illustrate this, let’s break the closers into three tiers. Tier One is settled with minimal risk. Tier Two is settled but with an element of performance or injury risk. Tier Three is unsettled.

TIER ONE

• American League (3): Chicago, Cleveland, Kansas City
• National League (4): Atlanta, Cincinnati, Miami, Pittsburgh

TIER TWO

• American League (6): Baltimore, Boston, Minnesota, Seattle, Texas, Los Angeles
• National League (9): Arizona, Chicago, Colorado, Milwaukee, Philadelphia, San Francisco, St. Louis, San Diego, Washington

TIER THREE

• American League (6): Detroit, Houston, New York, Oakland, Tampa, Toronto
• National League (2): Los Angeles, New York

Looking at supply and demand, there are 12 fantasy squads (on paper) in search of a closer. Of course strategically someone can opt to avoid closers, at least for the auction, but let’s say the demand is 12.

Assuming a Tier One or Two closer at least has the job, the supply in the AL is just 9, falling short of demand. In the NL, the supply is 13, greater than demand. Economics 101 teaches us the cost of a closer in the AL should exceed than of the NL. Let’s see what transpired.

Just as expected, more money was spent chasing saves in the American League since the supply paled in comparison to demand. Just looking at the top-12 in each league, the AL spent $29 more, $188 as compared to $159 in the NL.

The top-three in the NL cost a little more than the top-three in the AL but that's probably because they're of better quality and there will always be a handlful of owners willing to pay not only for the saves but the whiffs and ratio support that is often overlooked.

There are some fascinating comparisons across leagues. The 12th closer in the AL was a tie between Clippard and McGee. One has the job because of injury and the other is hoping to return from injury and reclaim his job. In the NL, the 12th closer was also a tie, between K-Rod and Reed. The former has the job while the latter is hurt but still on target to be ready for opening day. That's a pretty significant contrast. In the AL you aren't assured of a regular closer while in the NL, there's risk but at least they have a job opening day and should keep it barring injury or bad performance. And, you got your guy in the NL for $2 less.

Let's compare the 8th in each group, Rodney and Benoit. They profile remarkably similar. Both have had success, but both also don't exactly give their owner the warm and fuzzies. Both work in great pitcher's parks with strong setup men. Both are the 8th priced closer in their leagues, except Benoit costs $5 less.

Finally, even the speculative choices cost more in the American League. Clippard, Miller, Soria and Boxberger all cost more than their NL brethres, Giles, Quackenbush and Romo.

It's real easy to reverse engineer a scenario like this. The trick is being out in front of it and spending 14 on Steve Cishek, perhaps the best deal among all the closers. In the AL, the prescient move would have been to predetermine closer prices would soar so spend a little more and grab a still reasonably priced Cody Allen.

Please realize this was one set of auctions and not every one will follow the same patterns since the participants are different. However, what occured is completely supported by supply and demand economics. If I had to guess what will happen this weekend in the Tout Wars auctions, I'm staying the course and will predict the AL half will spend more than the NL half when it comes to addressing saves.

Later in the week we'll look at other aspects of the LABR auctions and attempt to employ more basic economics to look for trends that can be used to better construct a winning roster.