This research attempts to measure the impact of monopsony power on baseball players with less than six years of experience. Past research indicates that players with less than six years of experience have lower salaries than players with the same productivity and more than six years of experience. To try and combat monopsonistic behavior, baseball player's formed the Players' Union and instituted an arbitration process. Through this process, a third party arbitrator listens to cases from both a player and owner and then chooses either the player's or the owner's salary bid. While this process is intended to help players gain market power, it is still unclear whether the actual process is effective. Therefore, it is important to evaluate trends in players' salaries before, during, and after arbitration in order to see if further changes in the arbitration process need to be made.
To do this, 19 outfielders who have filed for and received an arbitration hearing during the time frame of 1990-2003 are examined following their career throughout their pre-arbitration (first three years), arbitration year (after third year), and post-arbitration years (after fourth year on). By using the human capital model, three ratios of the players' actual salaries during these years to a predicted free agent salary are estimated. The prediction that the ratios should increase throughout these three periods, due to the fact that the players gain more market power, is supported by the results. In fact, the ratios of actual to predicted salary increase from 0.27 in pre-arbitration years, to 0.97 in the arbitration year, to over 1.2 in post-arbitration years. This indicates that the players face substantial monopsony power in the pre-arbitration year followed by a decrease in monopsony power through the arbitration process and post-arbitration years.
Tarman '05, Andrew, "The Effect of Monopsony Power in Major League Baseball on the Salaries of Players with Less Than Six Years in the Majors" (2005). Honors Projects. 31.