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Sunday, August 6, 2017

Pricing Football Transfers: The market is flawed

Pricing Football Transfers: The market is flawed

Football transfers have been increasing the maximum asking price possible for a footballer since the beginning of the professional era in the early part of the last century. It is not expected that transfer prices would decrease since due to inflation the price of few things have decreased from the last century to now. However, football players exist in a market that has become increasingly flush with money due to revenues from television and the cost of a football player now is far in excess of what would be expected under inflation.

Football transfer fees are difficult to estimate in terms of being a good deal because there is little that is sure. Football and form is fragile and a good player in the past is not guaranteed to be so in the future. Furthermore, young players frequently fall short of expectations. A football transfer has to capture the current worth of the player, the worth of the potential of the player (which is closely linked to age since players tend to hit peak performance in their 20s) and the demand and supply for the type of player.

The current worth of the player should be guided by inflation and the worth of the potential is subject to analysis by experts in scouting. It is the third point, the demand and supply, where it seems that the market is not behaving logically. While we cannot expect that footballers will be sold for lower prices than in the past or even lower prices than expected due to inflation regularly, it should be expected that some players move at exactly the price in the past occasionally.

It may not be immediately obvious why this is so. This is because a footballer is not an exact commodity. A striker is not the same as a goalkeeper and will not be priced as such. Furthermore, at times there have been few good forwards and at times (such as now) few good defenders. Hence, it would be expected that now, defenders cost a lot but with the quality attacking players available, some should be less expensive than they were in the early 2000s when good attacking players were not as frequently found (though perhaps the amount of good defenders at the time affected the goalscoring records).

A comparison should help with showing the difficulty in finding logical price points. While midfielders play in a variety of positions and so pricing can vary, strikers generally can only be one type if bought for a large sum. Clubs only break the bank for a guaranteed goal scorer when buying a striker (as useful as poachers, target men and second strikers are, they don’t really get sold often and in fact are finding opportunities increasingly limited in the modern game). Hernan Crespo moved to Lazio in 2001 for £25 million at the age of 26; Andriy Schevchenko moved to Chelsea in 2006 for £30.8 million; Gonzalo Higuain moved to Juventus in 2016 for £75.3 million. Both Higuain and Schevchenko were 29 at the time of their move and all the players moved from Serie A with Schevchenko being the only player to go abroad. All the players had years of success in Serie A and Schevchenko had recently won the Ballon D’or and top scored the Champions League and Serie A. Higuain had also top scored in Serie A with 36 goals, equalling a record standing since 1930.
In 2016, at an inflation rate of 35.6%, Crespo should have cost £33.9 and Schevchenko should have cost £36.67 at an inflation rate of 19.1%. Crespo’s move, had it happened in 2006 would have been expected to cost £28.47 at an inflation rate of 13.9%.

In summary:

Price sold(actual £)
Expected Price (2016, inflation)
Amount over expected

Hernan Crespo
Andriy Schevchenko
Gonzalo Higuain

The value unaccounted for exceeds the expected price for both Schevchenko and Crespo. Now, it is easy to say that Higuain is not the same player as the others and so not an exact fit. This can be agreed upon. However, Higuain is older than Crespo and hence has less potential and has less pedigree than Schevchenko. The sale of Higuain for a price of £75.3 was greeted with derision by many fans due to his age and also for the perception that Higuain does not perform well in important games. The second part of that statement is debatable but in assuming Higuain to be inferior in terms of like for like quality, perhaps it makes the estimate more viable. (Fans of the Premier League can state (with hindsight) that moving from Serie A to England is no guarantee of goals and they would be right. But no transfer is guaranteed to score and it seems unlikely that Darren Bent or Robbie Keane who scored comparable goals in England during the 2005-2006 season would have been better to spend £30.8 million).

This comparison shows clearly that transfers are not in line with inflation, with all other factors being held constant. It also seems that the market has moved even for adjacent goods. Strikers are judged by goals and rarely by potential. A goal machine tends to have an eye for goal at a young age and even if the goal quantity is low, goals per match or per minutes played will be high. There is no logical reason for strikers to be overvalued unless they are scarce and with record goal tallies all over European leagues, this is not the case. But midfielders and forwards (not pure strikers) are valued on potential and this potential has pulled prices upwards.

It is not easy to gauge pure potential. There is no market for potential, after all. It is not a distinct entity that can be bought and supplied. The best approximation at the moment is the fact that Real Madrid have bought Vinicius Junior from Flamengo for £39.6 million. Junior was 16 at the time of the sale in 2017 (he will not move until 2019) and had not played a single minute of first team football. He had, however, scored many goals at Under-17 level for Brazil, with 7 goals during Brazil’s win at the South American Under-17 championship. This is not a guarantee of quality. Since 1997, only Edwin Cardona and Milovan Mirosevic, for Colombia and Chile have top scored this tournament and then gone on to play for the senior team.

Assuming the value of potential to be £39.6 million, it explains the difference between the prices expected for strikers and the actual. These strikers would not have been bought for their potential but to continue to score at the same levels. But, the price of potential seems to be embedded in the market, even when it isn’t really relevant. After all, if many sales are for midfielders and forwards who must have the price of potential in their price except in rare cases, then this price is now a common part of market price.

Rationally, the price of strikers should be lower than those of forwards and midfielders. But it is not. Either strikers are being bought at prices that include potential, when there is no need for this. Or strikers in the past were severely undervalued, which seems impossible since lower goal scoring tallies and more defenders of quality being present actually made it harder to find good strikers and hence they were at a premium.

If we assume £39.6 million is a fair price for potential, then midfielders and forwards are largely being sold for a fair price taking into account inflation plus potential. Defenders command a high price due to scarcity, much as strikers did around the turn of the century. But strikers should not be extremely expensive and should have seen price deflation. The fact that all the prices are going up irrationally seems to indicate that the transfer market is in a bubble.

Reasons for the bubble are unclear. It is likely that during the off-season transfers are the most common way for clubs to stay in the news and transfer speculation keeps clubs relevant during social media during the off season. There is surely more to it than this, as during World Cup years transfer speculation remains rife though this is perhaps understandable since for many this is a chance to showcase value. The fact is, on their own, transfers are important due to their ability to capture headlines and signal to fans that their club is preparing for the next season. It also shows ambition. In that sense, the transfer serves not only as a boost for the team but also as an extravagant way to show the manager is serious.

It is becoming increasingly difficult for clubs to buy for a small fee, even if it was possible. Arsene Wenger has spoken about the fact that he would be ridiculed if he bought a player for less than £1million and tried to insert him in the first team. This is logical. It is not that a player cannot be good enough to play at the top level for such a price. The market is not rational and it is possible players are undervalued as well as overvalued. But if we assume potential to be worth £39.6million and the fans, who may not be aware of the figure, see a player bought for a small figure they will still assume there is not any value in this purchase. At the extremes of the market, it takes a lot of belief that the market is totally irrational or that the manager can really beat the market to not assume that a player who was sold for £1million is worth buying.

This is reducing the chance of discovering new unknown players by bigger clubs, though it should not affect the chance of younger players. But for players who are not in bigger leagues, the chance of moving may be ever decreasing. This is not a problem by itself as there are many good players in major leagues to choose from. But it is irrational to close sectors of the market and focus on overpriced places only.

The fact that prices by position do not fluctuate but increase means that the market is not behaving logically. Television revenues may have played its part in funnelling money into the transfer market (though with declining viewership, the bubble might pop eventually) but it is unlikely that these revenues alone will keep things going. The market may continue to increase forever. There is no reason for it not to. Markets may remain illogical for a long time. However, a logical outcome of an illogical market is a concentration of wealth. If only rich clubs can afford players, they can hoard the best players and make it harder or impossible for others to challenge. We may see superteams be the norm in the future. Is this a good thing? This is also subjective. But a debate about super-teams or underdogs is another thing altogether.

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