Tuesday, 25 January 2011

The Myth of Market Value

It's January, just in case you were unaware, which of course means that we have the usual, steady flow of transfer action. Many managers choose to stay out of the bidding at this time of the year, most notably Ferguson and Wenger who rarely delve into their pockets mid-season through claims that 'there is no value in the market'.

The truth is surely that there is never any real value in the market. This because there is no set market price for players. Every transfer is based on a set of individual and changing circumstances. Having been slowly making my through the interesting book 'Pay as You Play: The true price of success in the Premier League era' by Paul Tomkins, Graeme Riley and Gary Fulcher, it is clear that there is a set criteria that will always determine the value of a transfer.
      1. Position, age and ability of the player
      2. The contract situation of the player
      3. The needs of the two clubs
      4. Respective financial situations of the two clubs involved – as Andrew Thomas recently wrote about.
      5. Now, with the new home-grown rules implemented, the player's nationality.

These are all relatively straight forward. A goalkeeper is usually where you get best value for money. Often they are the least expensive and will play the most. Strikers, on the other hand, will always cost more in the transfer market. Why? Simply because goals are the most valuable commodity of the game. You can't win anything without them. Thus you will always pay above the standard rate for a player who can score them.

Age is self-explanatory. The older the player the less value there is their purchase. A young player can be bought cheaper as he is yet to realise his full potential and then developed and sold on – such is Wenger's tactics. Players in their prime, usually their mid-20s, will cost the most as you are buying the finished article, so to speak.

Obviously the vital factor is the ability of the player. This is where valuations will vary between clubs and fans. How much do we rate a certain player. This valuation will also vary depending on whether a team is in particular need of a winger or striker etc. A team in dire need of a left-back will be more likely to pay more than may appear fair for a player to fill that hole. Another team may have a surplus supply of mid-fielders (ahem-Tottenham) and therefore one of them could be purchased at a knock-down price.

The fourth criteria I have outlined is what will always make some transfers appear misleading. The easiest examples to use are those involving Chelsea or Manchester City. Clubs like this - who have huge financial backing - will more often than not face the problem of inflated price tags. The teams who own the players they want know they can demand over the market value from such wealthy clubs. Poorer clubs, in contrast, are much easier to pinch players off as they are not in as strong a position to resist the economic gain from selling one of their players. Clubs entering administration of who have been relegated are thus predictably vulnerable.

The fifth and final factor is also straight-forward. The inevitable consequence of enforcing Premier League squads to contain a higher proportion of English players is that the value of them in the transfer market increases considerably.

With all this in mind, it becomes far easier to understand why some transfer deals that may, at first glance, have raised a few eye-brows are not quite so baffling. Darren Bent may have cost £24million, which is £1.5million more than Torres cost Liverpool (calculated by the Current Transfer Purchase Price in 'Pay as you Play'), but he does have a better goal-scoring record since his move to Sunderland. Bent averages a goal in ever 1.73 games over the past 18 months compared to Torres' 1.84.

When you add the factors that Bent in English, Sunderland did not particularly need the money from the deal and it was in January, when clubs are more reluctant to lose key players, the Bent transfer makes far more sense. Is he a better player than Torres? Almost certainly not. But he fits the bill. He is what Aston Villa needed and when assessing the criteria above it is easier to understand why he cost them so much.

Ian Holloway declared that Liverpool's valuation of Charlie Adam (£4.5million) was “disgraceful”. Again, however, the factors must be considered. Blackpool are a much smaller club and thus do not have the same strength in financial negotiations. He also doesn't have the added bonus of being home-grown. Then there will be the difference in opinion over just how good the player is. Holloway may think he is better than he is because he is so integral to the Blackpool team. Liverpool may see him as a different player, performing a different role – one that does not warrant the 'big bucks'.

Ultimately, comparing transfer will prove fruitless. There are so many variant factors that is becomes extremely difficult to provide a price tag to any player that is not merely a reflection of the status of said player within the context of the place the two respective clubs find themselves in.

Thoughts, comment and opinions please...


  1. Really liked this. I'm an economics graduate and football nut, so this is bringing together my two biggest interests! I've read a lot of Stefan Szymanski's stuff (the textbooks are a lot more complicated and dry than the bestselling book!), but really need to get cracking on with reading Tomkins' book.

    If I could add a couple of things though. Demand obviously has a massive affect on price, and the main determinant of demand is income. Therefore, with more money in football than ever before, we can't underestimate how this has affected prices. Bent's transfer reeks of inflation to me.

    Also need to consider that football clubs and owners of football clubs are utility maximisers rather than profit maximisers. It's not often their aim to find the best "value", but to do what will help them achieve a specific goal (trophies/success) regardless of cost. The marginal utility received from each additional pound spend must decrease massively further up the scale. The difference in ability between a £10m purchase and a £15m purchase may be miniscule, but it could be the difference between winning a trophy or not (even if the latter is more efficient). So although Wenger is very "efficient", that isn't necessarilly his job.

    Then of course there's what you let onto in your article, what economists call "asymmetric information", the fact that the buyers don't know the true value of a player (and probably never will). In theory, free markets only work perfectly where there is information asymmetry. As I said, in theory....

    Again, thanks for the great read!

    Tom Addison
    Twitter: @TomTrulyReds

  2. Cheers Tom. Glad you enjoyed it. I know very little about economics so do not venture into it that often. I would recomment @SwissRamble to you, if you are not already aware of it. Excellent site about the finances of football clubs.

    I would have to disagree with you on one point though - "owners of football clubs are utility maximisers rather than profit maximisers". I think that, in the majority of cases at least, clubs are run out of the incentive to make money. This means that yes they may be willing to pay money for players but they are doing so to attract more fans, win matches, qualify for Europe, win trophies, avoid relegation etc. All this is done with the view to making more money. Thus where they can save/make money through buying players cheaply or selling their players for lots of money then they invariably will.

  3. Yeah I've been on Swiss Ramble before, he did a great analysis of my club, Man United, which I often reference to. Hell of a site, isn't it?

    Getting technical, in economics "profit maximisation" is where marginal costs equals marginal revenue. In real life it's pretty much all bollocks, but the point is that it doesn't just refer to making profit, but maximising it.

    I get what you're saying about clubs being run to make money, they have to in order to survive I guess! And with the likes of the Glazer's coming in, they've seen the potential of sport to make massive amounts of cash, and thus are using the clubs to try and maximise their own wealth.

    A good example of utility/success maximisers though are Abramovich, Mansour, Walker, the sugar daddy's. I understand owners like this do not represent the situation at the majority of clubs, but I'm going to take a view somewhere in the middle here and say a clubs objective is to achieve as much success as possible whilst avoiding bankruptcy. The key is how far to the edge of the cliff they are willing to tread. I think a club tries to make money in order to win trophies, not the other way round. To try and summarise this ramble up, I'd say a clubs objectives, in order, are:

    (1) Survive
    (2) Win trophies
    (3) Make money (to aid (1) and (2))




Previous posts