http://sportsillustrated.cnn.com/2007/writers/tom_verducci/03/20/matsuzaka0326/4.html (Begin at paragraph starting with “By 2005…”)

http://jpbpa.net/convention/2001_e.pdf (Starting with paragraph (9) to paragraph (12))

Baseball clubs in Major League Baseball are always trying to out compete each other in order to win a championship at the World Series. This competition occurs not only on the diamond but in the business world as well. In searching for newer and better players, MLB’s long arm has stretched across the Pacific Ocean to Japan, which has a thriving baseball culture. However, it is not quite so easy for an American baseball team to simply sign a Japanese baseball player of their choosing. The MLB and Japan created a policy involving an auction, after the San Diego Padres obtained exclusive rights to a player in 1997 without giving other teams a chance.

First, a Japanese club must declare that a player under the club’s contract wishes to be signed by an MLB club. Then the MLB commissioner accepts blind bids from all of the clubs interested in obtaining the rights to sign player. The commissioner then runs a first price, sealed auction, awarding those rights to the club with the highest bid.

In 2006, Japanese superstar pitcher Daisuke Matsuzaka, in need of a bigger challenge, decided he wanted to move the MLB. His team, the Seibu Lions, announced the decision, and the MLB started the auction. The Boston Red Sox ended up winning the auction with a bid of $51.1 million. However, that number was not their true value for the negotiating rights with Matsuzaka and probably was well above it, meaning a negative payoff. This occurred for two reasons. First, the auction was a first price auction, not a second price, where the dominant strategy is not to bid your true value. Second, the teams involved in the MLB auction were most likely not using independent private values. This was because team A would actually get a negative payoff instead of zero for losing the auction because it would later have to face the winner, team B, in competition for a championship, with their new superstar. The Red Sox placed a “$50 million bid as a hedge against the [New York] Yankees,” their division rival. In doing so, the Red Sox very well may have received a negative payoff in winning the auction for the rights to sign Matsuzaka, but then again, there is always a price to pay for the satisfaction of beating the Yankees.