35. Wrong To Match
The IPL Player auction is efficient, but for one important quirk
|Karthik S||Dec 13, 2019|| 1|
We take a break from data here, and will instead engage in the “conom” part of the name of this newsletter - on the economics and game theory of auctions
And the IPL player auctions are here again, less than a week away. 971 players threw their hats into the ring, but the field has come down to 332 after none of the eight teams showed any interest in the other 638 players. The players have been classified into 44 groups of seven or eight based on the level of interest in them, and these sets of players will be taken up approximately in decreasing order of “demand”.
There are a total of 73 slots remaining across teams (each team needs a 25 member squad), and the teams have a total of ₹207.65 Crores (or ₹2 billion, equivalent to $29.3 million) to spend on the players. This represents over 30% of the total salary cap of ₹680 Crore. For a “minor auction” (where mainly players released by teams and those who didn’t play last season are auctioned), this is a rather big amount.
The auction, as usual, will be an “open outcry”, or “English”, auction. Within each group, players are drawn in random order (this is necessary to make the auction fairer), and the auction starts at the player’s “base price”. The base price is increased in predetermined increments at the auction, and teams indicate their ability to meet the price by raising a paddle. When there are no bids for a particular price, the team that bid the previous highest price gets the player.
There is a reason why auction amounts are increased in fixed increments, and called out by the auctioneer. This is to prevent teams from colluding on the auction by giving each other signals, which can be done in terms of less significant digits of amounts or tone of voice.
This was especially a problem in the telecom spectrum auctions in the US in 1997 (paywall-free summary here - see number 4), when bidding companies used less significant digits of their bids to indicate which postcodes they were bidding for. That allowed them to collude and the auction raised just about one-hundredth of what it was expected to raise. Since then, fixed increments have become the norm at big auctions.
An open outcry auction like the one that is to be used in the IPL player auction is generally efficient, because it allows teams to indicate their “true willingness to pay” as part of the bidding process. For example, if Kings XI Punjab thinks Robin Uthappa is worth ₹5 Crore, then they will continue bidding for him as long as his auction price is lower than the amount, and cease bidding when the auction price crosses the amount.
This way, whether they get Uthappa (for a price less than or equal to their willingness to pay) or not (if his price is higher than their willingness to pay), their “welfare” is maximised.
The open outcry auction is economically similar to a sealed bid second-price “Vickrey auction” in terms of the bid amounts, except that the open outcry allows participants to revise their bid values based on the information they get on who is bidding how much. For example, two teams going hard for a player might suddenly convince a third team of his value that they had hitherto overlooked, and encourage them to join in as well.
While this makes the open outcry auction rather fair, there is one quirk of the IPL auction which renders the process inefficient. This measure was introduced in the name of ensuring continuity for teams.
Teams that have released players have a limited number of “Right To Match” cards that allow them to buy back players who have been sold to other teams at the auction by matching the price. While this is standard in all kinds of auctions (including procurement contracts), what makes it unfair is that the application on an open outcry auction.
Let’s say that RCB have valued Robin Uthappa at ₹3 Crore. Let’s assume that KKR, the team that released him, have a willingness to pay of ₹2.5 Crore for him. KKR won’t bid, but if the auction values Uthappa at anything less than ₹2.5 Crore, they will exercise the right to match card for him. In the ideal scenario, given the respective willingness to pay, RCB should be buying Uthappa and not KKR.
Except that the Right To Match Card tilts the bidding in favour of the team that released the player. Consider this scenario.
The bidding for Uthappa starts at his base price of ₹1.5 Crore. Interest soon dies out, and at ₹2 Crore, RCB are the only team left in the auction (KKR haven’t bid). Nobody else raises the paddle for ₹2.1 Crore. The auctioneer Hugh Edmeades will set his hammer on the table and say “sold to RCB for ₹2 Crore”. And then ask KKR if they will match the price. And since the amount is less than their willingness to pay for Uthappa, they will get him.
This is unfair, because RCB was willing to pay a higher amount for Uthappa, but they simply have no opportunity to do that! If the competitive auction had gone on, for example, until ₹2.6 Crores, KKR would not have exercised their Right To Match (since their willingness to pay is ₹2.5 Crores), and RCB would have had a fair shot at getting Uthappa. Because the auction ended early, RCB were denied the chance to express their full bid.
So why is the Right To Match card inefficient in the IPL while it is a standard part of other kinds of auctions (such as telecom spectrum, procurement contracts, infrastructure, etc.)?
The problem is the use of Right To Match with an open outcry English Auction.
In most auctions where right to match is used (outside of cricket), the standard bidding process is a sealed bid second price “Vickrey auction”. In a Vickrey auction, each team bids its true willingness to pay (it is economically optimal for them to do so). This way, when a team is given the right to match, they are facing off against the best possible bids by all other teams.
In the IPL auction, however, thanks to the open outcry nature, teams are not allowed to express their full willingness to pay once all other teams in the contract have dropped out. And that gives an unfair advantage to the team that released the player.
This inefficiency in the auction process might explain why there are so many slots up for grabs in the auction. Teams know that the auction structure gives them a massive handicap in getting back their old players, and so they are more willing to release the player into the pool.
I had written about this particular market inefficiency in Mint six years ago, and hoped that teams would “bid alone after all other teams had backed out” in order to express their full willingness to pay.
Unfortunately, in six years, so far no team has tried doing that. I still hope some team will try that stunt, and this kind of scenario might play out:
Auctioneer: Sorry, you can’t bid now. The last ast bid was yours.
Team: Yeah, but we don’t want the right to match card to be exercised. So we will keep bidding against ourselves until we think we have expressed our true price.
<and then some fight and discussion and commotion will ensue>
It will make for fun TV, if not making the process fairer!