Mo Salah and the economics of transfer markets

The transfer window is approaching and clubs maybe looking to add players to their squad who were previously under contract with another club. Such a transfer is completed by registering the player into the new club through FIFA. The upcoming window for the Premier League is from 1st January – 3rd February 2025. Mo Salah’s contract expires at the end of the 2024/25 campaign, and he is yet to be offered a new deal by Liverpool. Salah said recently:

“Well, we are almost in December and I haven’t received any offers yet to stay in the club, [so] I’m probably more out than in.”

What is the economics involved in the transfer market?

Supply and demand – players are the labour force offering skills and revenue potential to the club. The club demand labour to improve output of the club – e.g. trophies etc. Mo Salah has been in great form with 12 goals this season for Liverpool, who are currently top of the EPL. This makes the 32 year-old a very marketable player and boosts his earning potential. However some would say his age needs to be considered.

Marginal revenue product of labour (MRPL) – the revenue potential from signing a player can involve: greater match attendance and ticket sales; broadcasting rights revenue due to player; merchandise sales; marketing potential through social media.

Monopsony and bargaining power – a club could at as a dominant buyer especially for youth for under-contract players. However, player agents can negotiate wages etc and out of contract players can negotiate with multiple clubs. See graph.

Market inefficiencies – there can arise that clubs may not be fully aware of the player’s potential and fitness although clubs nowadays do run strict medical examinations before signing a player,

Principal agent problem – this is where the player’s agent may prioritise personal commission over the best outcomes of the player and the prospective club.

Opportunity cost – could the money spent on one player be used elsewhere? Also some clubs look at the short-term benefits of acquiring a star player rather than long-term financial sustainability. The Premier League clubs all have players on deals that add up to a cumulative number of years between Everton’s 47 and Tottenham 97, for an average of around 71.5 years. In August this year Chelsea had 191 years of cumulative contracts. That means that if they strung out all their existing contracts back-to-back to have one current player at a time on their books, they would still have someone there in 2215.

Inelastic demand The demand for star players becomes highly inelastic as clubs are willing to pay a high price regardless of small changes in the transfer fee. This then relates to the concept of consumer surplus where the clubs pay a transfer fee that exceeds the actual market value due to competition from other clubs.

Spending in the transfer market receives a lot of media attention e.g. Kylian Mbappé’s move from PSG to Real Madrid. This has a multiplier effect in that it should lead to higher spending on tickets, merchandise and increase the revenue for other local businesses.

Psychology of transfer markets

• Action bias – new signings create interest and excitement amongst the club’s supporters. Boards like to win them over. However this could lead to more action on the transfer market which is not justified and therefore unnecessary spending.

• Winner’s curse – an open auction environment can lead to overpayment. The threat of another club entering the transfer market can increase a player’s value further. Earlier this year there was a bidding war for Riccardo Calafiori between Chelsea and Arsenal with the latter securing his signature.

• Optimism bias – a club believes that the decision to sign a player is more likely to turn out positively and don’t question the potential negatives that may occur. In 2023/24 Sandro Tonali joined Newcastle for £60m from Milan and became the most expensive signing in Newcastle’s history. However with just 1 goal at the end of the season and a suspension in October for breaching gambling rules whilst at Milan, Newcastle suffered from optimism bias.

• Confirmation bias – similar to optimism bias in that clubs seek out information on a player that fits with, or enhances their existing preconceptions or what they want to see.

• Zero price effect – the word FREE is very powerful and can encourage people to make irrational decisions. For instance, Dan Ariely carried an experiment with consumers and gave them three options see below. All 3 options are the same in monetary value – $5 – but by saying the product is free is a lot more attractive. A free transfer is not necessarily free. For example a player is still under contract with one club and is being paid £400,000 per week for his services but moves to another club under a free transfer. The club that he moves to will have to pay his salary although there is no transfer fee paid

Sources: Economics Behind Football Transfer Markets

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