Twice a year the general public is shocked and impressed by the large amounts dispensed by football clubs. They do so to attract players and build a competitive and ambitious team. The Football Observatory of the International Center for Sport Studies (CIES) recently released its 81st issue of their Big-5 weekly post (focused on the Big-5 European first division football leagues; England, France, Spain , Germany and Italy). It records an amount of 2.433 Millions of Euros spent by the clubs during last summer’s transfer window. But what determines the value of a football player and how is the football transfer market unique and particular?
The CIES Football observatory has developed an algorithm to price players. According to them, players can be priced by incorporating factors ranging from the length of their current contract to a club, their age, their position, the number of games and the competitions they were played in, to their actual performance measured in goals and team points achieved while playing. Using these characteristics and comparing the results with players transferred for amounts above 10 million euros in the Big-5 leagues, they found out that most transfers were over paid and some even underpaid.
In fact, other player-specific characteristics come in to play to price football players. These might be, but are not limited to, their particular type of character, their level of professionalism, their marketing value and their importance in the current club they are registered to. In addition, other market specific characteristics not taken into account in the algorithm may explain the differences between prices paid and calculated value.
The football transfer market can be seen as a specific labor market and has been regulated by European Labor policies such as the Bosman act which permitted the free movement of players free of contracts within the European Union. As such; player mobility has increased, the transfer market has become more liberalized and can be compared to a free market. Players move wherever their marginal return is higher and their value is supposedly lower for the selling club than for the buying club. Furthermore, agents represent players and take as remuneration a fraction of the transfer fee. Those agents are usually established, and can highly influence the decision of a player due to their networks and experience in the field. It has been showed that participants (clubs, agents and players, but primarily clubs) in the football transfer market may as well display irrational behavior not solely driven by financial incentives.
Another characteristic of the football transfer market is that it is limited in time, and it happens only twice a year. Once transfers are made, clubs spend most of the season with the same group of players and need to face uncertainty as to their performance, involvement and injuries. Holding many players may diversify this risk but it would increase a club’s costs because player remuneration is the biggest part of a clubs operating budget. This uncertainty coupled with the time constraint can give considerable bargaining power towards the seller or the buyer when having to strike a deal.
Given the above we cannot assume that players are priced solely on their experience and talent. There are a multitude of stake holders and thus a multitude of determinants for football player pricing which explain the differences found by the CIES Football observatory. The football transfer market may be very liberalized, but most probably far from efficient.