Many Minnesotans are upset at the possibility that Major League Baseball may eliminate two teams, one, of course, being the Twins.
It’s a big story here, prompting news organizations to watch every move and listen to every utterance of the principals: baseball officials, prominent business executives, politicians and Twins owner Carl Pohlad and his family.
But I wonder if anyone has spied economist Michael Spence, the 2001 Nobel Laureate in economics, meeting with Bud Selig?
I ask because if Spend has been counseling the lugubrious baseball commissioner, a lot of things make more sense.
Spence, along with George Akerlof and Joseph Stiglitz, won the Nobel last month for research into how people make economic decisions with imperfect information.
His particular contribution was on the process of “signaling.” And signaling may be the best explanation for what the baseball owners are trying to do with their talk of contraction.
Signaling occurs when an individual or group takes on costs to transmit credible information in an effort to improve their economic situation.
Such signaling may be as simple as buying a new suit and getting a haircut before going to an important job interview. The applicant communicates he really wants the job and is willing to spend some money and time to get it.
A more complicated, and purely hypothetical, example would be an airline that dominates some regional hub.
Whenever some upstart airline starts to compete on a specific route, the dominant carrier aggressively cuts its fares to prevent the challenger from getting a toehold.
The dominant carrier may not even be making any money on the particular route where it’s challenged, but risks gaining a reputation for passivity if it doesn’t respond. By aggressively cutting prices, it signals to all potential competitors that it is lean and mean, rough and tough, ready for a fight.
It’s difficult to see how reducing the number of baseball teams by two would directly increase profitability for the remaining clubs. But it would send a strong signal to two groups that the owners might want to intimidate host cities and players.
The prospect of contraction tells players not to be aggressive in salary demands. “We are the monopoly buyers of your services. If you get too uppity, we can slash several dozen jobs right out of existence.” Players on all teams would get the message since the stars on the contracted teams could effectively bump lower-ranked members on any other team.
It also tells cities and states that it’s dangerous to refuse demands for new stadiums. “Refuse to give our owners what they want, and we’ll take the team away from you even if that means killing it.”
This tactic goes back to the Roman army where “decimation” meant killing every tenth soldier in a unit that had not fought well to “encourage” the nine that remained. The French Army—which in World War I shelled its own mutineers—had the phrase por encourager les autres, meaning to encourage the rest.
Spence, who is from Stanford University, would certainly see strong logic in Selig’s position. Much of Spence’s work, and that of this co-laureates, uses a set of ideas called game theory. And “signaling” can be a tactic within a broader strategy.
Originally used during the Cold War to calculate nuclear deterrence, game theory eventually was applied to any situation of decision making under uncertainty where one participant’s action will influence the action of a competing player.
Telecommunications firms used game theory in bidding strategies for auctions of telecommunications spectra
However, game theory didn’t keep many such firms from paying more than they could expect to recoup. Today many of these firms are close to insolvency because they successfully used game theory.
Wars, and some ballgames, are like that. A bold tactic may win a battle, an inning or a quarter. But sometimes those bold tactics also spark some response that eventually leads to disaster for the bold attacker.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.