Minimum Fee Release Clause & the Transfer of Footballer

- Game Theoretical Approach

(with One-sided Uncertainty and Reputation Mechanism)

Phattaraphon Hongsrisook 4904640812

EE481: Industrial Economics,

Bachelor of Economics (International Program),

Thammasat University

Minimum Fee Release Clause: Definition

Minimum Fee Release Clause is nothing new in the soccer industry all around the
world as it has been used for some time in many soccer leagues especially the Spanish
Soccer League. The Portuguese, French and some other European leagues also use it to
some extent. However, it is still not widely practiced in the English Premier League.

“Release Clause” or “Minimum Fee Release Clause” is a clause in a footballer’s

contract which sets a minimum fee that a club must bid in able to buy that footballer. If a
club bid’s the minimum fee set in a footballer’s contract in an initial payment, his club
cannot block the bid and must allow the bidder to talk to the footballer. Footballers with a
minimum fee release clause can still be sold for less than the set fee, at the club’s discretion.
[ CITATION Def09 \l 1033 ]

As mentioned in the above statement, bidding the minimum fee does not guarantee
that the bidding team will necessary obtain the footballer. Rather, doing so just grants the
right for the bidding team to do negotiation with the footballer for employment contact.
Thus, whether the bidding team obtains the footballer or not depends on the reaching of a
contractual agreement between the team and the player.

In reality, required minimum fees in footballers’ release clauses are usually set very
high. The clubs or the owners of footballers’ contracts often benefit from such clause
because they tend to put a large fee requirement in a footballer’s contract that they don’t
want to let go of. Thus, in the footballer transfer process, it is always better for bidding team
to firstly try to offer an amount of transfer fee with the hope that the offer will get
accepted. Then, if it is not so, the team may choose to claim the option of satisfying the
Minimum Fee Release Clause.
 EE481 Research Paper 2
4904640812 Phattaraphon Hongsrisook

Statement of the Problem

Since this type of clause can be applied to almost every industry in which all
employers are required to make employment contracts with their employees. Thus, it is
worth everyone’s attention.

Does “minimum fee release clause” really perform in accordance with what it has
been claimed? Is it just another excuse for the football clubs to exploit their players by
making money? To answer these questions, this research paper examines the impact of
Minimum Fee Release Clause on the behavior of football clubs in transferring footballer by
applying the sequential game theory with one-sided uncertainty into analysis.

“Transfer Period,” or “Transfer Window,” or “Registration Period”

As being stated in FIFA’s Regulations on the Status and Transfer of Players (2008)
about the transfer period of footballers, there are two transfer/registration periods in one
season.

“The first registration period shall begin after the completion of the season and shall
normally end before the new season starts. This period may not exceed twelve weeks. The
second registration period shall normally occur in the middle of the season and may not
exceed four weeks. The two registration periods for the season shall be communicated to
FIFA at least 12 months before they come into force.”[ CITATION FIF03 \l 1033 ]

Methodology

For simplicity in analysis, this paper assumes big team “B” as the team with financial
assets in hand available for buying a footballer who is currently owned by small team “S”. In
short, there are two players in this game: the big team (B) and the small team (S). Given the
situation that the manager of big team is having an interest upon a footballer currently
owned by the small team. The manager of the big team insists to obtain this footballer
regardless of what means it takes. In this model, he is provided with two strategic options:

1. Clamming the Minimum Fee Release Clause and pay the required minimum fee
subjected to the clause.

If the big team chooses this option, the game suddenly ends in the way that
the big team obtains the footballer assuming that the team and the footballer reach
at a contractual agreement. By bidding the required minimum fee to the small team
then the small team has no other option then undeniably accept.

2. Making an offer with a specific amount of transfer fee to the smaller team then wait
for the small team to respond.
 EE481 Research Paper 3
4904640812 Phattaraphon Hongsrisook

On the contrary, if the big team chooses this option, the game comes to the
next turn in which the small team has to make decision. In such manner, the small
team chooses between two ways of response:

1. “A” – Accept the offer

If small team responds this way, the game eventually ends.

2. “R” – Reject the offer

If the offer is rejected, the first round of this game completes. It, then, comes
to the big team’s decision whether or not to initiate the second round by further
choosing between the two strategic options again.

To predict or illustrate the decision-making of the two players, the payoffs to both
parties are assigned in each given situation so that each party can decide upon which
strategy each one will take to attain the maximum payoff. The objectives of the two players
are explained in the following paragraph.

The big team wants to obtain the footballer at lowest possible cost. Thus, the
dominant strategy of big team is to make an offer. On the contrary, the small team wants to
sell the footballer at highest possible price. Thus, the dominant strategy of small team is to
force the big team to pay the minimum fee release clause.

To proceed gradually, let initially observe this game with single-round sequential
approach. Then, follow by the repeated sequential approach with one-sided uncertainty and
reputation mechanism.

Approach 1: Single-round Sequential Approach

Variables: β and α

While the variable “β” denotes net utility the buying team (big team) will receive
from the footballer supposed that it obtained the footballer, the variable “α” signifies net
utility the small team currently receiving from the ownership of the footballer.

The utility in this model is merely the mathematical expression of net benefits a
footballer contributes to its owner. In real world situation, these net benefits are such as
the incremental awards the team would get when the team has this footballer.

Assumptions:

1. It is a matter of fact that team will not offer another team an amount of transfer fee
higher than the required minimum fee specified in the Minimum Fee Release Clause. Thus,
for simplicity, the required minimum fee specified in the footballer’s contract is assigned to
the numeric value of 2. Whereas, the amount of transfer fee the big team offer to the small
team in exchange for the footballer is attributed to a lower assigned value 1.
 EE481 Research Paper 4
4904640812 Phattaraphon Hongsrisook

2. The net utilities (both α and β) are already discounted to present value.
3. The net utility the buying team (big team) will receive from the footballer supposed
that it obtained the footballer (β) is always greater than the net utility the small team
currently receiving from the ownership of the footballer (α). The mathematical expression is
“Β > α”.

Since we previously assume that the bidding team is a big team while the team
owning the footballer is a small team, the difference between β and α can be easily
rationalized by the explanations that bigger team has better training ground that the
footballer can develop his skill even more, and that bigger team has higher chance of getting
trophies and greater awards.

In this model, both variables (β and α) are defined with some numeric values with
the following conditions of β > 1 and ½ > α > 0. The given conditions are designed so that
both parties can really achieve higher utility from trading the footballer with each other.

The Game Tree:

( β-2 , 2-α )
Claim the clause

B ( β-1 , 1-α )
Accept

Make offer S

Reject (0,α)

Suppose that the game is played only one round and the provided conditions are “β
> 1” and “½ > α > 0”;

Strategy of Small Team

Given that B has made an offer to S, the dominant strategy of S is to choose to

accept the offer since “1-α” is always greater than “α”.

Strategy of Big Team

Knowing that S would choose to accept, the best response of B is to make an offer so
that it attain the higher utility of “β-1” rather than the lower utility “β-2”.

Nash Equilibrium

In conclusion, the Nash Equilibrium in this single-round sequential game is (Make

offer, Accept) with the respective payoff of ( β-1 , 1-α ).
 EE481 Research Paper 5
4904640812 Phattaraphon Hongsrisook

Approach 2 (A): Repeated Sequential Approach with One-sided Uncertainty

One-sided uncertainty

When big team demands a footballer, it does not know whether the footballer is
skilled or unskilled. In arithmetical saying, the big team “B” does not know if it is B 1 or B2.
But the small team knows this because it is the legal employer of the footballer thus having
more information about this footballer.

Additional Required Assumptions (to the second approach)

1. There are two natures for this game:

One is the nature that the footballer is a skilled footballer. The first nature is
assigned with the probability of “P”.
Another nature is that the footballer is an unskilled footballer. The assigned
probability is “1-P”.
2. The conditions of the numeric values given to both variables (β and α) are redefined
in this approach as follow:
For the first nature: β1 > 2 and 1 > α1 > ½
For the second nature: 2 > B2 > 1 and ½ > α2 > 0

The Game Tree:

Figure: Extensive Form Game

( β1-2 , 2-α1 )
Claim the clause

B1 ( β1-1 , 1-α1 )
“A” - Accept
Pr (Skilled footballer) = P
Make offer S1

Nature “N”
“R” - Reject ( 0 , α1 )

( β2-2 , 2-α2 )
Claim the clause
Pr (Unskilled footballer) = 1-P

B2
( β2-1 , 1-α2 )
“A” - Accept

Make offer S2

“R” - Reject ( 0 , α2 )
 EE481 Research Paper 6
4904640812 Phattaraphon Hongsrisook

With all the new provided conditions concerning α 1, α2, β1, and β2, the two players
definitely act differently from the first approach, given that reputation mechanism stills
absent. In order to find the dominant strategy of each player, let first separates this game
into two sub-games based on the two given natures then find the sub-game perfect
equilibrium of each sub-game.

Sub-game 1 (first nature):

Strategy of Small Team

If S is S1, S will always choose reject since “α1” is greater than “1-α1”.

Strategy of Big Team

Knowing that S1 would choose reject, B will always choose to claim

the clause since “β1-2” is still greater than “0”.

Sub-game Perfect Equilibrium

The Sub-game Perfect Equilibriums are (Claim the clause, Reject) for
this sub-game.

Sub-game 2 (second nature):

Strategy of Small Team

If S is S2, S will always choose accept since “1-α2” is greater than “α2”.

Strategy of Big Team

Knowing that S2 would choose accept, B will always choose to make

an offer.

Sub-game Perfect Equilibrium

For this sub-game, the equilibrium is (Make an offer, Accept).

Nash Equilibrium

Provided with these two sub-game perfect equilibriums, it is still unable to find the
ultimate Nash Equilibrium because Bayesian Theorem cannot be applied. Since the theorem
proposes that the uninformed player will decide its action based on the prior decision made
by another informed player before him. In this case, as the dominant strategy of the big
team is depending on the probability “P” however the big team does not any knowledge at
all about this probability “P” at least in the first round of the game. The only way the big
team can know about this is by observing the reaction of the small team after the big team
makes a decision. Thus, in the first round of the game, the big team will always opts for less
 EE481 Research Paper 7
4904640812 Phattaraphon Hongsrisook

risky option which is to “make an offer.” Though this decision may lead to less favorable
payoff (β2 - 1) to big team as the small team is likely to “accept” the offer if it appears to be
the second nature, nevertheless it is better to risk “clamming the clause” and having even
worse outcome of (β2 - 2). It is also noted here that even when the big team make an offer
to the small team given the second nature, it is not necessary that S 2 will always choose
accept since the reputation mechanism may performs.

Approach 2 (B): Repeated Sequential Approach with One-sided Uncertainty and

Reputation Mechanism

Reputation Mechanism

When a game is repeated several times, the effect of “Reputation Mechanism” can
be raised. Applying such mechanism to a game, the effect of perception and belief come
into consideration when a player makes decision. For this game, “Reputation Mechanism”
involves the big team’s belief about the chance that the footballer is skilled or, in
mathematical explanation, the perceived probability that the footballer is skilled (“perceived
P”). The explanation on how to adjust this perceived probability is provided in the following
paragraphs.

Applying the conditional probability of Bayesian Theorem into this model can help
explain this mechanism more clearly. Baye’s formula is applied to create the following
equation which derives the “probability that the footballer is skilled given that the offer
made for that footballer is rejected” or “Prob(S1|R)”.

Prob ( R∨S 1)× Prob( S 1)

Prob ( S 1|R )=
{Prob (R∨S 1)× Prob(S 1)}+{Prob (R∨S 2)× Prob(S 2)}

For simplicity, the period of the game is provided as follows: (assuming that from the
current period on, there are “n” rounds of game left.)

Period Last Next periods Current Previous periods

period period
(2) … (n- (n- (n- (n- (n+2 (n+3)
Stage (n+1)
(1) 4) 3) 2) 1) (n) ) …

Player S S…S S S S S B S S S…

Initially, as being assumed, the probability “P” is unknown by big team “B” but by
small team “S”. Nevertheless, the sequence of actions and responses of small team would
give some clue about this probability “P” to the big team. With this condition, the small
team can influence the belief of the big team by merely curbing its own responses.
 EE481 Research Paper 8
4904640812 Phattaraphon Hongsrisook

Intentionally, small team with unskilled footballer would try to make big team believes that
its footballer is skilled so that the big team chooses to pay the minimum fee release clause.
To create the perception that the footballer is skilled in the thought of the big team, the
small team with unskilled footballer will choose to reject the offer every period even when
the footballer is, in fact, unskilled. The logic behind is given as follow:

If there is an offer at previous stage n+1 and this offer is accepted meaning
“P” in the stage n+1 (Pn+1) is equal to 0. Then in the current stage, the perception will
be adjusted so that Pn is 0. The explanation is that if an offer is made and the small
team accepts, then the footballer is an unskilled footballer for sure because if the
footballer is skilled the small team will reject. Once the big team knows that the
footballer is unskilled, the big team will never agree to pay the required minimum
fee specified in the clause.

If there is an offer at previous stage n+1 and this offer is rejected meaning “P”
in the stage n+1 (Pn+1) is higher than 0. The big team may think that the footballer is
skilled and might opt for paying the required minimum fee specified in the release
clause.

On the other side, the big team will adjust its own belief every time the small team
rejects the offer. Doing so will result in gradual increase in the perceived probability that the
footballer is skilled (“perceived P”). As can be seen from the adapted version of Baye’s
formula, an increase in “perceived P”, which is being referred as “Prob(S 1)” in the formula,
would make the “probability that the footballer is skilled given that the offer made for that
footballer is rejected” or “Prob(S1|R)” become higher. So, if small team is able to make
“perceived P” (of big team) high enough before the transfer deadline ends, big team might
choose to claim the minimum fee release clause and pay the required minimum fee.

Nevertheless, choosing reject forever makes small team missing the opportunity to
gain higher utility from selling the footballer. So, when it is very late as the last period of the
transfer session (let say the period “1” in the sequence), it is better for the small team to
choose accept rather than reject regardless of the nature because the utility of “α” is still
higher than the utility of “1-α”. Or else, it has to wait for the transfer window to open again
later. The big team knows this fact so it will keep making an offer as late as possible.

Providing that such reputation mechanism exists, the strategy of each player is
different from what has been proposed in the previous Approach 2(A).

Strategy of Big Team

The big team’s decision whether to claim the clause or to make an offer is depending
on the comparison between the expected utility from claiming the clause and the expected
utility from making an offer.
 EE481 Research Paper 9
4904640812 Phattaraphon Hongsrisook

Expected Utility from Claiming the Clause:

P( β 1−2)+(1−P)( β 2−2)

Expected Utility from Making an Offer:

(1−P)(β 2−1)

1. Thus, the big team will choose to claim the clause when the “expected utility
from claiming the clause” is higher than “expected utility from making an offer”:

P( β 1−2)+(1−P)( β 2−2)>(1−P)( β2 −1)

Or, when the actual probability “P” is higher than the critical point:
1
P>
(β 1−1)
2. The big team will choose to make an offer if the actual probability “P” is lower
than the critical point:

1
P<
(β 1−1)

3. The big team will be indifferent between claiming the clause and making an offer
and thus randomizes between the two choices when the actual probability “P” is
equal to the critical point:
1
P=
( β1−1)

Strategy of Small Team

As mentioned earlier, the objective of small team is to persuade the big team to
believe that the footballer is skilled and is worth the required minimum fee specified in the
Minimum Fee Release Clause. In order to make big team willing to pay the minimum fee, the
small team must try to raise the “probability that the footballer is skilled given that the offer
1
made for that footballer is rejected” over the critical point “ ”. In mathematical
(β 1−1)
form, the condition is given as follow:

1
Prob (S 1∨R)>
( β1 −1)

Prob ( R∨S 1)× Prob ( S 1) 1

>
{Prob(R∨S 1)× Prob (S 1) }+ {Prob( R∨S 2) × Prob (S 2)} ( β 1−1)
 EE481 Research Paper 10
4904640812 Phattaraphon Hongsrisook

1× P 1
>
{1× P }+{Prob (R∨S 2)×(1−P)} ( β1−1)

P+ {Prob(R∨S 2)×(1−P) }
<(β 1−1)
P

∴ Prob ( R|S 2 )<

{( β 1 – 1 ) × P }−P
( 1−P )

The derived condition above means that in order to make big team willing to pay the
minimum fee, the “probability that the footballer is unskilled given that the offer made for

that footballer is rejected” must be lower than a critical point “

{( β 1 – 1 ) × P }−P ”.
(1−P )

1. If it is the first nature or “the footballer is skilled,” then the small team will
always reject the offer whenever the offer comes in.
2. If it is the second nature or “the footballer is unskilled,” the decision of the small
team whether to accept or to reject an offer made by the big team at stage “n”,
thus, depends on the number of period (n) and Prob(R|S 2) when the offer is
made.
a. If it is the last period (n is equal to 1) and there is an offer made by the big
1
team, (P < ), the small team will respond by accept the offer. The
(β 1−1)
explanation is that it is better to trade and gain higher utility at the time
rather than leaving aside the transaction and both teams have to wait
until the next transfer period in order to talk about the transaction again.
b. If there are more than one period left (n is higher than 1) and there is an
1
offer made by the big team (P < ), the small team will reject the
(β 1−1)
offer if rejecting the offer at this stage n can make the big team clamming
1
the clause in the next stage n-1 (or making “Pn-1 > ”).
(β 1−1)
c. If there are more than one period left (n is higher than 1) and there is an
1
offer made by the big team (P < ), given that the big team still
(β 1−1)
make an offer in the next stage n-1 though the offer is rejected at this
1
stage n (Pn-1 < ) the small team then:
(β 1−1)
 EE481 Research Paper 11
4904640812 Phattaraphon Hongsrisook

i. Reject the offer with the probability of

{( β 1 – 1 ) × P }−P
(1−P )

ii. Accept the offer with the probability of 1−

{( β1 – 1 ) × P }−P
( 1−P )

Key Findings/ Conclusion

Without asymmetric information and skill difference of each footballers, the football
transfer produces an efficient result that the bidding team choose to make an offer which
will soon be accepted by the team owning the footballer’s contract, given that the fee
offered is within the range of two teams’ utilities (“β” and “α” as proposed in Approach 1).

When one-sided uncertainty is added to the situation, the result differs. As the small
team knows the fact about the footballer, it has its main reactive strategies in mind to
respond to different action of big team. On the contrary, the big team is unknown about the
footballer’s skill so it must first observe the reaction of small team in order to have some
clue about what the nature is. This observation of the big team obviously cannot be done in
the first round as the big team makes its decision before the small team. Thus, it must wait
for the next round. In the first round then the small team opts for less risky option “to make
an offer”.

Further addition of “Reputation Mechanism” to this model, the informed small team
can decide to exploit the uninformed big team given asymmetric information. As the game
can be repeated many times so the big team has to observe the reaction of the small team
in each round of the game, therefore the Bayesian Theorem can be applied. By applying
Baye’s formula, the perceived probability (“perceived P”) come into play and determine the
dominant strategy of each player.

Further Implication

This paper can be a useful base for many further researches. For example,
prospective researcher can investigate on how to reduce asymmetric information in football
transfers, how to encourage football clubs to set more realistic minimum fee in release
clauses, and so on.

References
Definition of Minimum Fee Release Clause. (n.d.). Retrieved December 2, 2009, from
http://soccerlens.com/should-premier-league-teams-add-minimum-release-clauses-to-player-
contracts/8158/#ixzz0X1YjV0Xu
 EE481 Research Paper 12
4904640812 Phattaraphon Hongsrisook

FIFA Statutes. (19 October 2003). Article 5. In “Regulations on the Status and Transfer of Players”
(Article 5 of the FIFA Statutes of 19 October 2003).