Monopsony in baseball

The most important prediction of the monopsony model is that the wage rate paid to the blue collar employees will be lower than if the labor market were competitive. One example that offers striking support for this prediction is the dramatic increase in player salaries in baseball following the introduction of the free agent system.

Prior to the free agent system, a baseball player was a ‘free agent’ that could negotiate with any club until he signed his first contract with a major league team or its minor league affiliate. Once signed all baseball contracts contained a renewal or ‘reserve’  clause stipulating that thereafter the player’s services were the sole property of that club for his entire career in baseball unless the club decided to sell or trade his contract. That reserve clause effectively turned the market for individual players into a monopsony by preventing them from negotiating with any other club but their own.

An Arbitrator struck down that reserve clause on December 23, 1975 by ruling on grievance brought by the Major league Baseball Players Association (MLBPA) under the new agreement negotiated by MLBPA and the owners. That stated that players were no longer permanently tied to a club or team. The effect of that agreement was to turn what has been a monopsony into a competitive market.

Some studies indicated that players salaries rose - that is true for the average players as predicted by those studies.

Other studies indicated that the monopsony model is that the blue collar employees are paid less than their marginal revenue of what they produce in a competitive market. Those same studies found clear evidence of their prediction, even with the rise of salary the majority of the players were paid below average.