IPL Auctions and Economics….

Having watched the IPL auctions on the last weekend, the linkage to economics and auction theory could not be missed. One cannot call for a better cocktail than learning economics using cricket or interpreting cricket events to draw lessons from economics.

Niranjan Rajadhyaksha & Ravi Krishnan of Mint have this superb article linking IPL with auction theory, game theory portfolio management etc. They make the job so much easier. They say this time teams have become wiser and have opted to build a winning team than just go for Marquee stars. Barring Rajasthan Royals (RR), all teams seem to have spent less on marquee players.

Almost every team has spread its money around more evenly since 2008, with the proportion of the budget used to buy the five most expensive players falling sharply. IPL auctions now seem to be more about building winning teams rather than thirsting for marquee names to draw in crowds at a time when IPL was an audacious but untested experiment. The only exception to this trend is the Rajasthan Royals, which won the inaugural IPL despite spending very little money on stars. A team of relative unknowns had famously eased ahead of star-studded opponents. The proportion they have spent on their five most expensive players has climbed.

That is a surprise from RR really who did so well first time around.

They say IPL team owners acted like both portfolio managers and venture capitalists. This is an excellent analogy from the authors.

  • Portfolio managers as they have fixed funds and have to allot their monies on both big players (large cap) and shining/ smaller ones (mid/small cap). As there was a cap of USD 9 million on the budget, the teams had to make proper choices. Unlike fund managers where if someone takes a security it can still be bought. This wasn’t the case here. So they had to make changes in case their preferred player was bought.I would also like to add it was kind of a theme fund which looks at winning the IPL by picking players who fit in the T-20 format. So classic players will only fit in if they can play T-20. Just like classic stocks wuill only be a part of the fund if they form part of the theme. The broad objective of both is the same – maximise the returns.

    Then some teams like Chennai retained many of its earlier players by buying them back. Other teams did not buy as much with Punjab showing bidding aggresively but not able to retain them. Mumbai retained 4 key players before the auction. This could mean Chennai as a fund manager was more confident and familiar with the earlier held players/stocks. Which is quite true as well as it has been the most successful team reaching finals in 2008, semi finals in 2009 and winning in 2010. Mumbai retained 4 going by 2010 experience. Other teams have believed in churning their portfolio completely as performances not great. KKR in particular has done the unthinkable by not just retaining the biggest player (stock) but not biding at all for him – Sourav Ganguly. Likewise other biggies like Lara, Gayle have not been bid for as they do not fit in the theme portfolio for different reasons.

  • VC as they have to spot young talent from the various uncapped players who they bring to the side. Just like VCs, IPL team owners are looking for unlisted securities (read uncapped players ) which can be the future large cap security. So buy them young and sell laters for big amounts. Think about Yusuf Pathan(2008 edition), Manish Pandey (2009 edition), Saurabh Tiwary/R. Ashwin  (2010 edition) which were the unlisted securities in earlier editions.Going by the experience so far, RR proved to be excellent VCs in 2008 edition. Though they could not become large cap and it was just a one-off performance. In other words, they could not be successful MF  managers.

I wrote an article for Mint after 2008 IPL auction and just wanted to compare now with what I said then. The article talks about two things. One, IPL should have used sealed bid second price auction for auctioning teams. Two, it should use dutch auction for players. The idea in both was to avoid the winners’ curse. I had also added IPL should be a success but could be better if the overall greed was lower and gradual approach is followed.

I have just been right on one thing- IPL should be a success (which was just a given so will not take any credit). Apart from this, there have been no changes with stakes only becoming higher:

  • In 2010, two new teams were auctioned – Kochi and Pune. Again, they seem to have used sealed bid first price auction instead of sealed bid second price auction.
  • In 2011 player auctions again English auction is followed.
  • IPL is anything but a gradual approach. It just keeps getting bigger. The teams have struggled so far and barring RR I don’t think  anyone has broken even.
  • We seem to be hearing that teams have become wiser this time around. Well only time will tell.

Apart from this, how about analysing IPL from an institution economics perspective? In this regard, there is a need for substantial improvement. There is a still a lot of opacity in the way finances of the teams are handled. IPL also ran into a scam but like many Indian scams just carries on. There is hardly any progress on cleaning up the image of the IPL. And as we see in India, the accused teams like accused politicians not just come back but come back stronger! IPL has become more democratic after ouster of Lalit Modi but has a long way to go. 

Like Indian Economy, IPL has tremendous potential. But it needs proper governance and accountability. Both are missing right now. There is also a need to balance between long-term and short-term in both economics and cricket. T-20 is  a short format and real test for a player lies in Test Cricket. So, there has to be a balance and test matches should play the dominant role.  Similarly, short-term policies are popular but it is long-term policies which help build a sustainable economy.

6 Responses to “IPL Auctions and Economics….”

  1. IPL Auctions and Economics…. « Mostly Economics | E-Auctioned Says:

    […] more: IPL Auctions and Economics…. « Mostly Economics This entry was posted in Uncategorized and tagged better-cocktail, cricket-events, […]

  2. IPL Auctions and Economics…. « Mostly Economics | PenneBid Says:

    […] post: IPL Auctions and Economics…. « Mostly Economics This entry was posted in Uncategorized and tagged better-cocktail, cricket-events, […]

  3. IPL nudging! « Mostly Economics Says:

    […] latest IPL player auctions generated huge media response and discussions. As the teams did not pick former India […]

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