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Entertainment and Media: Markets and Economics

Casino Gambling

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Casino Gambling The Market

Gross Revenue 2012: $37b – Churn: about $700b State/Local taxes: $8.6b Employment: 330,000+

Competition: Caesars+MGM 30% Top 5, (incl. Harrahs, etc.) 40% Local monopoly – national market shares are meaningless

The Product A Production Function? Casino Profitability Why Do People Gamble?

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Casino Production Function

Output: Two or more Gambling profits Entertainment experience (Las Vegas) Food and drink

Inputs Fixed: Most of the cost structure, Ambient music Variable: Labor, drink, foodstuffs, supplies, small.

Economies of Scale? Certainly Economies of Scope? Unclear Technological Advance? Definitely

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A Casino Production FunctionSubstitution of Inputs

Technological Advances:

Bill changers at slot machine stations

Automatic Card Shufflers at Poker and Blackjack Tables

All electronic, video card games

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Labor Saving Technological Change in Poker

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The Essential Element of Casino Profitability

House advantage Games are not “fair”

Expected winning is always negative, even when payout is proportional to true odds.

The “product” of this result is predictable via the Law of Large Numbers.

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Casino Profitability – Certainty

The essential result: The Law of large numbers.

Event consists of two random outcomes YES and NO

Prob[YES occurs] =

Prob[NO occurs ] = 1- Example: Throw a die. True Prob(Face = 6) = 1/6.

Event is to be staged N times, independently

N1 = number of times YES occurs, P = N1/N

LLN: As N Prob[(P - ) > ] 0

no matter how small is.

The law states that if you run the experiment enough times, the proportion of “successes” in the runs of the experiment will eventually match the actual probability of success.

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Interpreting the LLN

For any N, P will deviate from because of randomness.

As N gets larger, the difference will disappear

Proportion of Times 2,4,6,8,10 Occurs

I

.1

.2

.3

.4

.5

.0100 200 300 400 5000

P1I

Computer Simulation of a Roulette Wheel

Number of Spins

P

5.132

38

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Casinos Use the LLN

Payout at any game setting in any repetition is unpredictable

Average payout over the long term, many thousands of repetitions is almost perfectly predictable.

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American Roulette

Bet $1 on a number (not 0 or 00) If it comes up, win $35. If not, lose the $1 E[Win] = (-$1)(37/38) + (+$35)(1/38)

= -5.3 cents. Different combinations (all red, all odd, etc.) all

return -$.053 per $1 bet. Stay long enough and the wheel will always

take it all. (It will grind you down.) (A twist. Why not bet $1,000,000. Why do

casinos have “table limits?”)

18 Red numbers 18 Black numbers 2 Green numbers (0,00)

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The Gambler’s Odds in Roulette

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Pay Less than True Odds

Hand Payoff True Odds

Royal Flush 100 to 1 650,000 to 1

Straight Flush 50 to 1 70,000 to 1

Four of a Kind 20 to 1 4,000 to 1

Full house 7 to 1 700 to 1

Flush 5 to 1 500 to 1

Straight 4 to 1 250 to 1

Three of a kind 3 to 1 50 to 1

Two pair 2 to 1 20 to 1

One pair 1 to 1 2.5 to 1

Ace/King 1 to 1 1.2 to 1

Caribbean Stud, 5 Card Poker

1. You must get the hand

2. Dealer must get Ace/King or better

3. You must have a better hand than the dealer

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Caribbean Stud Poker

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The House Edge is 5.22%

It’s not that bad. It’s closer to 2.5% based on a simple betting strategy.

These are the returns to the player.

http://wizardofodds.com/caribbeanstud

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Gambler’s Ruin

By dint of the LLN, a small, long term bettor eventually goes broke Assume house edge is 5% On an initial $1000, gambler leaves with $950. On returning to the table with the $950, the gambler leaves

with $902.50 After only two rounds, the house has gained 7.50% And so on…

A better strategy is to make one huge bet. The casino imposes table limits on all games.

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The Gambler’s Ruin

http://en.wikipedia.org/wiki/Roulette

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Since Hamman founded the Dallas-based company in 1986, SCA has grown into the world's go-to insurer of stunts that give fans the opportunity to win piles of dough if they make a hole-in-one, kick a field goal or sink a half-court shot. SCA determines the odds for each contest and charges event sponsors a fee based on the probability of someone succeeding, prize value and number of contestants. If the contestants win, SCA pays them the full prize amount. If they don't, SCA pockets the premium. "The primary distinction between us and [traditional] insurance businesses is that they restore something economically when something bad happens," Hamman says. "When you put on a promotion, you're simply taking a position on the likelihood of an event occurring."

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Information Asymmetry? Do gamblers know the true odds at any game?

Blissful ignorance

Bettors usually do not know the true odds.

Bets are always based on subjective probabilities which are usually too high in their favor. (Example, blackjack behavior)

Does the house know more than the gambler?The house relies on the law of large numbers and the house advantage. That is all they need to know.

Does it matter? Why does the gambler gamble?

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The Business of Gambling

Casinos run millions of “experiments” every day. Payoffs and probabilities are unknown (except on slot

machines and roulette wheels) because players bet “strategically” and there are many types of games to choose from.

The aggregation of the millions of bets of all these types is almost perfectly predictable. The expected payoff to an entire casino is known with virtual certainty.

The uncertainty in the casino business relates to how many people come to the site.

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Gambling Market

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Thriving

Not Thriving

Are there differences that explain why thoroughbred racing as an industry is thriving and greyhound racing is declining?

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Inevitable

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After Regulatory Scrimmage

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Amazingly Rapidly GrowingHugely Profitable

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A Different Game. Play for Prizes.

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Utility

Wealth

9

8

7

6

5

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3

2

1

0

At low levels of exposure, consumers enjoy risk. They enjoy unfair games. The fun of winning offsets the negative value of the game.

Casino

The same consumer insures their car and home.

Why Do People Gamble?