It's become an annual ritual almost at this point to be disappointed in the purchases made at the Indian Premier League (IPL) auction by the Royal Challengers Bangalore (RCB), who happen to be the team I cheer for at the tournament. The IPL Auction has been a fairly unique sporting and economic event since its inception, not least because most other sporting leagues see players recruited through drafts or through private negotiations.
The auction, which in econ terms would be called an 'English Auction' or an ascending price auction (with a pre-set reserve price - a minimum bid - for each item), is compelling to watch for the lay viewers since it is the commonest format everyone knows, having seen it in movies and pop culture. But over the years the format has produced some famously less than efficient results (remember Jaydev Unadkat, anyone?), especially when it comes to some of the more expensive buys. Part of the reason is that it is difficult to accurately evaluate and understand the value a player will bring to a franchise, but crucially, another part of it is that it's an auction poorly designed - it plays to the gallery and as a result, irrational factors sometime have an outsize influence on the price. One of the most talked about buys this year - Glenn Maxwell - is a great lens through which we can look at the economics behind how that might happen.
What we have seen most often with the eventual busts in terms of the price spent on the player, and the impact they left on the franchise's performance is that teams have ended up wildly overestimating the players' "private value" to them.
Standard econ theory about auctions is built on the private value and common value paradigms. Every item being auctioned has a common value. There would be a sense of general agreement (if not precise) about how much they are worth – the common value. In the common value paradigm, the value is the same for all bidders but each bidder has their own imprecise estimate of the value of the object (that depends on how much information they have or the quality of that information). The private value is what every bidder assigns as the value of the item to themselves at the time of bidding (if they were to possess it) and even if they did know of other bidders’ values, it would not affect how much the object is worth to the given bidder.
Interestingly, real world auctions like the IPL one involve a complex balance between private and common values. And that balance is susceptible to being swayed by the auction itself. Consider this assessment of Glen Maxwell "[He]...can bat and bowl spin and he’s a great fielder...[we] wanted an all-rounder. We had thought of some names before we came in and he was one of them.” Was this RCB's coach Mike Hesson explaining why the team paid nearly $2 million for the Australian all-rounder? Nope, that was Nita Ambani explaining in 2013 why the Mumbai Indians paid $1 million for the same player. What Hesson did say this year was "He's a multi-skilled player...We were looking for an X-factor player for the middle order." The private value argument here on its face seems quite reasonable. RCB desperately needed a spark in their middle order, and Hesson even rationalised why the fact that Maxwell had a horrid IPL season in 2020 (the big hitter clocked exactly zero sixes in the tournament in the 106 deliveries he faced) did not seem to affect RCB's bullishness ("He has been in good touch away from the IPL"). But in their ebullience RCB entered a bidding war with Chennai Super Kings (CSK), from which the latter smartly withdrew as the price jacked up. CSK's Balaji would say that the bidding "range was too high" and thus they abandoned the idea of buying Maxwell and "thought of a second plan".
Did RCB end up falling into the most classic of all ascending auction traps - the Winners Curse*? We can't know for certain at this point since the season is yet to be played, but back in 2013 when he was the most expensive buy, Maxwell's season at MI was quite a dud - he appeared in just three games and was released the next season. Clearly Mrs. Ambani, the then coach Anil Kumble, and the franchise had wildly overestimated the private value of Maxwell to themselves.
Of course, franchises do score smart bargains in the auctions but the fact that a version of the Glenn Maxwell saga plays out almost every season is evidence that it's not all rational.
*the term used to describe the tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item.