Yu Darvish and the Posting System: MLB’s Economic Disadvantage

On December 20, news broke that the Texas Rangers won the bidding rights to Japanese pitching phenom Yu Darvish, after bidding $51.7 million during the course of MLB’s posting system bid process.

The bidding for Darvish began as a result of something called the “posting system.”  Essentially, the posting system is an agreement between MLB and Nippon Professional Baseball (“NPB”) in Japan, whereby NPB can “post” its players between the months of November through March, allowing MLB teams to bid on the right to negotiate a contract with said NPB players.  Once a player is posted, the bidding occurs over the course of four days and proceeds in the form of a silent auction type of bid system, where bidders do not know the amount which other MLB teams have bid.  At the end of the four-day bidding period, the highest bidder earns the right to negotiate with the player.  A contract must be reached within a thirty-day period, otherwise the player returns to play in NPB and the MLB team does not have to pay the amount which it bid to the NPB team.  However, if a contract is reached between the bid-winning MLB team, the MLB team has to pay out its bid amount to the NPB team.  This amount is paid on top of whatever amount it has contracted to pay the former NPB player for his services.

The posting system was adopted in 1998, thereby modifying the United States-Japanese Player Contract Agreement, which was struck between NPB and MLB in 1967.  The posting system was sought by NPB after Japanese players were able to rely upon certain provisions of the 1967 agreement, namely its reserve clause, to escape their NPB contracts and play for MLB teams without said MLB teams having to compensate their former NPB teams. In 1998, the agreement was rewritten by a general manager of a NPB team to create the posting system.  Thereafter, NPB and MLB adopted the new agreement, which included the posting system clause.  The term of the agreement is one-year, and each party has the option to terminate the agreement by providing the other party with notice by the June 18  year preceding termination of the agreement.

While the posting system arguably is an effective model, as MLB teams continue to bid for highly sought after Japanese talent, one facet of the system is economically disadvantageous to MLB:  the silent auction type bid system.  The fact that teams are required to place secret bids for negotiation rights arguably swings the economic advantage of the system in favor of NPB.  In a system where bids are secretly placed, the bid amount for a player can be significantly overvalued.

Consider the case of Yu Darvish as a hypothetical.

While the Rangers ultimately bid $51.7 to obtain the right to negotiate a contract with Darvish, it is possible that the amount bid by the Rangers exceeded the true value of the negotiation right.  Say, hypothetically, that four teams bid for the right to negotiate with Darvish, teams A, B, C and D.  Team A bid $20 million, Team B bid $25 million, Team C bid $30 million and Team D bid $51.7 million.  While Team D’s bid won in the right to negotiate with Darvish, Team D could have obtained the same result by bidding $30,000,000.01.  Thus, in this hypothetical, Team D paid nearly $21.7 million more than was necessary to obtain the right to negotiate with Darvish.  That $21.7 million, if Team D is able to successfully negotiate a contract with Darvish, is taken from Team D’s MLB budget, preventing it from using to say, sign another high-quality player.  Rather, it is handed over to NPB to continue to develop its teams.  Arguably, the continued development of NPB’s teams will lead MLB teams to continue to seek ought NPB players’ services through the posting system.  As a result, NPB will continue to obtain more posting fees.  Thus, the silent auction type of bid system creates a cyclical program, whereby MLB teams are likely overcharged and money is invested in NPB development.

Thus, in future years, it would be in MLB’s best interest to seek a modification of the posting system clause which allows the bidding to be open and public.  This not only creates a competitive market for the player’s services, but also addresses NPB’s concern of going not being compensated when its players leave its system to play for a MLB team.

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