Thrill, exuberance, joy and happiness are some among the many words that millions of Indians would use to describe the Indian Premier League (IPL) season. The IPL is a professional Twenty20 cricket league launched in 2008 by the Board of Control for Cricket in India (BCCI). The tournament is played among eight teams that represent eight different cities of India; the franchisee rights of each team are sold to successful bidders for ten years. The IPL players are sold through a competitive auction that spans two days, wherein any given franchise aims to optimise their resources and create a squad of 18-25 players that maximise its chances of winning the title (and making money in the process).
While the auction procedure and the bidding process is common knowledge for many, not a lot is known about how the base prices for players are set in the first place, that is, how the players are valued by the franchisees. The total auction payment to the players exceeded USD 42 million in 2008, and today, the figure is even higher. This trend involving sky-high payments to IPL players poses the following questions: How are the bidding prices determined? What are the cricketing attributes and other factors that are implicitly decisive in the final bid prices? And, among these attributes, which are valued more than the others? Today, with the IPL being a festival more than a tournament, it is essential to develop even a basic understanding of what goes on behind-the-scenes.
There is no singular system of player valuation that can represent the approach that individual teams take in the IPL auction. However, a method that has, since a few years, united several researchers of the topic, is a form of hedonic price analysis. This approach treats a player as any other good or service and breaks it into its constituent characteristics to obtain estimates of the contributory value of each characteristic. In other words, a player is analysed as a combination of several different cricketing attributes and is valued by estimating and putting together the individual value of each of these attributes. Some of these attributes - that research shows have been key deciding factors for teams - are batting average, batting strike rate, number of stumpings, wickets taken and catches taken. A study shows that an increase in Twenty20 batting average by one run fetches an additional USD 5,430 to the cricketer’s final bidding price. Similarly, players are also being rewarded with USD 2,761 for every additional half-century. With regard to bowling, naturally, the largest factor in the valuation process is the number of wickets taken: every additional wicket taken earns a player an average of USD 335. One would also expect age to play a role in the final bid prices. This is indeed reflected in the final bid price; the previously mentioned study finds that, on an average, a player loses USD 28,518 for getting older by one more year.
Such determinants play a major role in setting the base price for a player; however, there is more to it. While on-field factors may still be the fundamental price determinant, there are off-field factors that are at play as well. These factors may or may not affect base prices, but almost always affect the selling price of a given player. From the team owners’ perspective, winning and crowd-pulling abilities of a player are crucial for IPL. Higher the ability to win and pull crowds of the players, higher will be the revenue earned from the sale of tickets, broadcasting rights, sports merchandise, memorabilia, and advertisements. For example, just before the 2008 IPL auction, Andrew Symonds and Harbhajan Singh were involved in a racial controversy and were perceived to attract big crowds. This was almost certainly the reason for their selling prices to be among the top 5% of the prices of all players sold in the auction.
However, it is important to note that this method of valuation, even though relatively sophisticated among other published approaches, cannot be said to reflect the thought-processes of every franchisee every year. For instance, if a popular cricketer announces his retirement after a given IPL season, a franchisee may see this as an opportunity to increase revenues and thus the cricketer’s selling price may spike up significantly. To some extent, these factors have been considered in the ‘non-cricketing attributes’ part of the method; however, it is impossible to categorise such factors and quantify their effects on the prices of all players.
The nature of the IPL is such that it is highly unrealistic to believe that the player valuation method is followed by all franchisees, or even that franchisees follow a valuation system in the first place. Personal relationships, conflicts of interest or similar factors may influence the prices more than even the most compelling statistical evidence. In a sense, this may be unfair to players that do not possess an established ‘brand value’ regardless of their cricketing prowess. Assume a base price is to be set for two cricketers: one is aged, statistically unimpressive, but draws significant admiration for his performance over the years; the other is a young player who has performed exceedingly well in domestic leagues and is statistically superior to the former player. Regardless of their current performances, it is almost certain that the former player will have a much higher base price. This does not fully undermine the hedonic pricing principle, however, it gives a disproportionate level of importance to non-cricketing attributes. After all, it is these attributes that allow franchisees and owners to make a fortune through advertisements, merchandise sales, et cetera. Therefore, in a general sense, while there are shortcomings in the price determination of players in the IPL, the current approach is opportune for the parties at the helm. One can only hope that a transparent approach to player valuation is generated that does not disadvantage certain groups of players and serves as a payment benchmark for the IPL seasons to come.
Author: Kavan Shah
A 16-year-old student pursuing the IB Diploma Programme at Dhirubhai Ambani International School, Mumbai. Passionate about finance and mathematics - and therefore, obviously, Moneyball and The Big Short.