Analysing the efficiency of transfer markets

By Matt Allen (@mattallen001)

February is upon us and we say good bye to the January transfer market. Clubs from Europe’s top 5 leagues made a total of 533 deals at a cost of £802.8m. These figures don’t include other big spending leagues such as the championship and the Bundesliga 2 which also spend a considerable amount of money.  With such high amounts of money flowing around the world, I ask the question: is it an efficient market?

Understanding the market

The football player market is very unique and is often hard to characterise with traditional economic market structures. There is a large number of buyers and sellers, yet these agents don’t have the same level of market power as each other and so certain clubs can act with greater power over others.

What gives these clubs market power? Financial backing, clubs with rich owners such as Manchester United and PSG face fewer financial constraints and so they can meet the fees with ease. This extends on a league wide level too, the premier league clubs all receive high fees for TV and advertising which puts them at an advantage over clubs from other leagues (see graph below). Clubs with greater academies also have more market power. Clubs which produce high quality talent can sell on to make a higher profit and if they hold players with desirable qualities can command a higher fee in the market. Reputation also has more of an effect, if you are a club with a poor reputation (lower average league position, for example) then players are less likely to want to join you meaning its harder to push through contracts for players once fees have been agreed. Alternatively, bigger clubs can unsettle players and force through transfers, Man City are notorious for this as seen with Mahrez days before the end of the window. Effectively this means that the market is driven by a small group of clubs with greater wealth, while smaller clubs get pushed around by the big boys.


Finally, the commodities sold in the market are semi-homogenous. They are the same in the fact that they are all footballers, yet they all have different characteristics which make their worth vary immensely. This is similar to the automobile market, fundamentally they have the same function and can be broken down into subcategories (Midfielder/Defender like a sports car/people carrier are different types of the same thing). Yet we know all cars are not the same, some are faster, look nicer. The same concept holds for footballers, they vary in skill, pace, shooting etc.

With this in mind we can now examine the dynamics of this market.

The efficient market hypothesis

The efficient market hypothesis is a concept in economics defined by Investopedia as:

“an investment theory that states stock market efficiency causes existing share prices to always incorporate and reflect all relevant information

Using this in a footballer market; player valuations should always incorporate and reflect all relevant information. As a result, all players should be sold for their exact valuation not more or less. When considering the information that could go into the valuation of a player we could use:

  • Past data – performance over the past few seasons can give pointers of how well they may perform in the future. This is the most important factor.
  • Age – older players have a shorter shelf life and are likely to perform for a shorter period after purchase
  • Experience – more experienced players can cope with higher pressure situations better than less experienced players.
  • The valuation of other similar players – these can act as signals of value.
  • Past injuries – an injury prone player is more of a risk and we’d tend to associate a lower valuation to these players.
  • Position – attacking players are under greater demand as they are often seen as the match winners and hence can command a higher price.

In reality, it’s difficult to accurately value a player. We can use the past seasons data but even then, that can’t guarantee future success and often players “flop”. This is where theory meets the reality of the football world. Simple things like not liking the weather, speaking the language or fitting into a style of play can all stop a player succeeding.

Those at the top of the footballing hierarchies are often basing their valuations on anchors. Anchoring is a behavioural economics theory that when making a valuation, humans have a cognitive bias where they’ll base their decision off of the back of one piece of information. So, in football a man of the match performance could add several millions of pounds to a player’s value when in reality the underlying data suggests that was a bit of a one off. The anchoring takes place when people use that performance as the basis of the players valuation. The result is an inaccurate valuation and hence, an inefficient market.

It would be safe to come to the conclusion that the efficient markets hypothesis doesn’t hold true in the football market. Perhaps there are other contributing factors than just poor valuation methods which is effecting the market.


Causes of inefficiencies – The new age of footballing monopolies

Chelsea Football Club are often ridiculed for their incredibly large number of players they have out on loan. At the time of writing Transfermarkt has them at 21 loanees at clubs around Europe worth £112.5m (I know this is problematic source but it’s the closest thing we have to a uniform valuation set). Is what they’re doing stifling competition in the market? Potentially yes, reducing the supply of players on the market could have a distorting effect which artificially inflates prices. Traditionally football clubs loan out players to get experience to later introduce into the first team squad, there is not really an issue here. The problem with Chelsea’s policy is that it holds onto these players with no hope of ever integrating them into the first team (with a few exceptions). If not having an inflationary effect on the market then it has the following functions:

  • An appreciative investment asset where players slowly increase in value, returning a future dividend when eventually sold on.
  • An illiquid monetary store of value which can quickly be turned liquid in order to finance the purchase of a high cost player.

Chelsea were just the tip of the iceberg when it comes to footballing monopolies.

City Football Group (owned by Abu Dhabi United Group) own between 100% to 20% of clubs spanning six continents such as Manchester City FC and New York City FC. Such a wide spread of businesses is an exercise in bluring the lines between a lifestyle and footballing group. It has been successful in achieving the lifestyle side of the project. City, with fans across the world is the tenth most supported club according to Digital Sport, a sports media company.


What’s more interesting with City group is the footballing operation and relationship between the six clubs it runs. It has the ability to loan players to each other, but here it won’t have to pay large fees normally associated with such moves. We could see this when Frank Lampard signed an agreement with NYCFC before signing a short-term contract with MCFC. Then after a season returning to New York to play for the club he was originally supposed to have signed for. City could be blamed for player hoarding in the same way that Chelsea have. This window alone they sent 8 players out on loan to various clubs.

This phenomenon isn’t limited to just two clubs: Arsenal loaned out 7 players, Man Utd 7, PSG 4 and Liverpool 9 over January. Apart from the ability of clubs to efficiently buy and sell players, this has knock on effects to the wider game. Constant moving around and a lack of trust to play at the highest-level stifles player development and stagnates English football. Between the top six Spanish clubs only eight players have been loaned out in January, with the majority of the youth getting game time in the development squads.


When you examine the market in depth you can definitely notice its flaws, yet it continues to operate year on year without large scale opposition. Whilst the inflation of players continues (mostly fuelled by the increase in price of TV fees) the most inefficient area of the market remains the loan market. There is much scope here for FIFA and the FA to intervene in order to promote the mobility of footballers between the academy setup and the first team. I hold out no hope in legislative action by a group so obviously captured by the clubs they are supposed to regulate.

Further reading

This interesting article by Eran Yashiv for Voxeu examines whether Neymar and footballers are part of an asset bubble:



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s