7 Oct 2014

Football, economics, and negotiations

Felix B writes:*

On 26 August 2014, newspapers reported one of the biggest deals of this summer´s football transfer period. The Spanish side Real Madrid had accepted a € 74.95m offer for their Argentinian international, Angel di Maria, from Manchester United. Just one month before di Maria´s transfer, one of Manchester United´s largest competitors, Arsenal London, signed the Chilean international Alexis Sanchez for €42.5m.

This is a significant difference in transfer sums paid, considering that both players share many characteristics on, as well as off, the football pitch. Both play the same position (right-wing), were born in 1988, and come from South American countries. Now, both have been transferred from the two most prestigious Spanish clubs to English ones.

Looking at the performance statistics of the two players raises questions about the difference in transfer prices. In the past two seasons Angel di Maria scored 20 goals and assisted another 44 goals in a total of 104 games, whilst receiving 13 yellow cards, one yellow-red card, and one red card. Yet in the same time period and league, Alexis Sanchez, in a total of 100 games scored 32 goals and assisted 35 goals, receiving 12 yellow cards, and zero yellow-red or red cards.

Analysing the current transfer fees the UEFA president, Michel Platini stated that no player is worth their transfer fee and that these will damage football as a sport. Yet, clubs continue to pay extreme transfer fees, and what is more arbitrary, differing sums for seemingly similar players. Thus the question rises what made di Maria over €30m more expensive than Sanchez. Did Arsenal simply make a bargain and Manchester got ripped-off? Or were there are other factors influencing the value of the two players?

The main problem, involving at least three parties, is based on the question of who (one selling club and at least one buying club) pays for what (the player)?

Football players are legally bound to their clubs, which have the exclusive right to play the footballer. Thus, the selling clubs will have to be compensated to terminate a contract and for the loss of their players, in form of a transfer fee. As such, Real Madrid and Barcelona were the sole supplier of di Maria and Sanchez respectively. This allowed them to set prices higher than the prices that would be found in competitive industries in an attempt to generate monopoly profits. The monopoly effect is not due to the international superstar status of the players but in the lack of reasonable substitutes that give Real Madrid and Barcelona stronger bargaining power.

The monopoly rent argument is the same for both players because both had long contracts at their former clubs. The main difference on the selling side is to what extent the clubs wanted to keep their players. Both di Maria and Sanchez have been victims of new strategies for Madrid and Barcelona. Real Madrid´s corporate strategy requires superstars that are internationally promotable to achieve commercial successes through sponsorship and merchandise. Di Maria has been regarded too introverted to appeal to a diverse international audience, which significantly reduced Real Madrid´s willingness to keep him. Similarly, Alexis Sanchez has been said to be missing the `winning gene´ required at Barcelona. However, only Sanchez has also fallen out with Barcelona´s new manager, Louis Enrique. Conversely, Madrid´s manager, Carlo Ancelotti, always regarded di Maria as an essential part of Madrid´s squad and continued to plan with him. Barcelona's disinterest in Sanchez gave Arsenal greater bargaining power compared to Manchester United in its negotiations with Real Madrid.

The situations at Manchester United and Arsenal also mattered. Every major club follows a certain philosophy to maximize its objectives. That implies that there are some clubs, who are willingly (over) spending to win while others prefer to operate in a more sustainable manner. After Manchester United´s poor 2013/2014 season in which they finished 7th, they publicly promised to spend over €200m on star transfers. This is how Manchester United handed a lot of bargaining power to Madrid, which held their targeted player, Angel di Maria.

In contrast, Arsenal London is well known for its reasonable spending and finished 4th with a young, talented squad in the season 2013/2014. Thus the general need for a player like Alexis Sanchez as well as the club´s inclination to pay higher prices was significantly lower than in Manchester United´s case. Whilst even Arsenal´s manager, Arsene Wenger, publicly announced that he would be investing in the team, he did not reveal Arsenal´s transfer budget or plans. Based on Arsenal´s confidential transfer –conduct and their already in-tact squad, the club did not handle over as much bargaining power to Barcelona.

Moreover, characteristics about a player and his current situation can affect the bargaining power of the selling and the buying club and thus influence the value placed on a player. Although any player has to comply with his contract, announcing the wish to move is a common phenomenon. This wish indicates that a player does not feel comfortable at his current club, which is not good for the current club as well as the player, since it might influence the player´s and/or the club´s performance. In the case of Alexis Sanchez, the Chilean stated that he wants to leave the club, because he does not expect to be playing enough matches in the future. In this manner, Sanchez himself decreased the bargaining power of the Barcelona. In turn, Arsenal gained bargaining power over Barcelona, since the selling team should avoid unsettling the player or the entire team by setting a too high asking price.

Conversely, Angel di Maria did not want to leave Real Madrid and announced his wish to stay at the club several times via newspapers. Thus, the need to sell di Maria as well as the inclination to demand a low price, in order to fulfil the player´s wish, was significantly lower than in Manchester United´s case, because the wish of di Maria was to stay anyways. Based on this wish, Real Madrid gained bargaining power over Manchester United in transfer fee negotiations. As a result, Manchester United was inclined to pay a higher price for its targeted player in order to change the inclination of di Maria and consequently Real Madrid.

Another characteristic of a player is his nationality. Research has shown that Argentinian and Brazilian players may generally come at a premium in the market. This premium relates to the association of ‘specialism’ that can be caused by a general perception of exceptional skill and natural talent of football players from the two countries [pdf]. Thus di Maria might simply provide value through the (perceived) relationship between skills and his nationality, leaving Real Madrid with more bargaining power over Manchester United. In contrast, Alexis Sanchez, coming from Chile, does not have such association with extraordinary, natural skills or talent. Hence, Barcelona´s bargaining power over Arsenal does not improve.

Bottom Line: Economic theories can and should be used to analyse characteristics about clubs and players together with the market power, as they often act as main determinants for the value a club places on a player. The example of Angel di Maria and Alexis Sanchez shows that the value of a football player is based on player as well as market power differences that matter to each individual club differently. Differences that matter also determine bargaining strategies and thus determine where the transfer fee lies.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.


Anonymous said...

I would add two things. First, despite the statistics that you presented, I think that there is a consensus that Di Maria is a superior player to Alexis.

Second, Manchester United is a public company with greater transparency regarding its financials. It also had a bad season last year and was therefore both manifestly in need of a top player and capable of spending a lot of money. On the other hand, Arsenal's financials were more discreet and their need to purchase a top player smaller.

Anonymous said...

I agree with the previous comment. Di Maria is considered a better player than Sanchez. Statistics (goals, cards, minutes played, etc. ) help but you have to correct them. Di Maria is a mid-fielder and Sanchez is a striker. So, a goal by Di Maria is more valuable.

In the other hand, there was an international showcase this summer: The World Cup in Brazil. Argentina was in the final and Di Maria played quite well. Given that the World Cup took place a couple of weeks before August (when European clubs carry out their “transfers”), the market value of Di Maria was increased.

In any case, it is a very interesting article.

Hank said...

I don't know football (soccer on this side of the pond, mate) as well as the north american sports but Felix didn't mention is that the ultimate price paid depends on how many (serious) bidders there are. The monopoly argument is only true to a certain extent bc there's market power on the demand side as well for the top players since only a handful of teams can afford those types of transfer fees. Once you kick in language/cultural issues (e.g., some players don't want to play in the German, French or Italian leagues) you can end up closer to a situation where it's monopolist vs monopsonist. Other than that, everything is pretty much on point based on my (very) limited understanding of the football transfer market.

Ruben said...

Interesting comparison.

Nonetheless, I feel that these modern transfer dynamics can be placed in wider scheme or system of perverse incentives.

Even though Platini is part of the system that accommodates corruption and unrestricted dominance of larger clubs, he is essentially right that transfer spending is completely disproportional. First of all, the largest football clubs in Europe (and abroad) are state backed, sponsored and incentivised to loan as much as possible in order to be able to bid excessive transfer fees. Especially the two Spanish giants in question are perversely stimulated to perpetually loan and remain indebted (to the point where they can default) in order to sustain the club prestige and chances for a title bid since the larger Banks continuously agree to extend and provide more (cheap) capital. Now the unbelievable component of this relationship is the fact that these Spanish banks are crippled, financially rotten and thus dependent on an almost continuous flow of European financial aid. For that reason, Europe and the European taxpayer are indirectly funding the transfers of Bale, James Rodriguez and all other temporal talents that are briefly successful, eventually benched and later on ruined by the abundance or inflow of other stars. Di Maria and Sanchez essentially became a victim of these perverse dynamics.

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