The Consumer Price of Gambling Online

(co-written by Sebastian Sinclair)

Unsystematic sampling suggests that the consumer price of gambling in online casinos is significantly lower than the prices Nevada casinos generally charge.

This appears to be true for table games as well as slot machines and video poker.

Nevada is a fully supplied casino market, deregulated in this respect, with the result that operators compete on price if they want to. Some operators do, advertising "99 percent payback" slots, "double odds" craps, even sometimes "single deck" blackjack, though you don't see that much any more. You won't find these low prices in large resorts along the Las Vegas Strip, of course, but Downtown, or in Reno, you will find these and similar low prices for gambling heavily advertised.

But gambling in Nevada is also heavily taxed--6.5 percent of gross gaming revenue (win), plus various local government taxes--compared to online gambling. Many online operators pay no taxes: not payroll, not income, and certainly not gambling privilege taxes like the 6.5 percent of win Nevada's unrestricted licensees pay the state of Nevada. Add to this equation the considerable capital expenditures required to build and maintain a physical gambling facility and it is clear that online operations have considerably more wiggle room when it comes to pricing than their Nevada counterparts.

Table 1:

Consumer Price of Slot Machines Selected States (2000)	Percentage of Handle
Nevada New Jersey Illinois Iowa Indiana Total U.S (1997)	5.23% 8.18% 5.74% 6.27% 6.56% 5.90%

*Source: Christiansen Capital Advisors, LLC

Table 1 presents consumer prices for slot machines in selected U.S. jurisdictions in 2000, expressed as percentages of handle, or, as consumers might think of it, pennies out of each dollar wagered. Slot gaming is cheapest in Nevada: 5.2 percent of handle, or 5.2 cents on the wagered dollar. New Jersey, with its effective statutory limit on the number of casinos, has the most expensive slots: 8.2 percent of handle, or 8.2 cents of each wagered dollar--three cents higher than in Nevada. Play very long and that 3 cents is a difference you will notice. The average price of slot gaming for the U.S. as a whole was 5.9 cents in 1997, the most recent year for which this statistic is available.

Comparisons are odious, and we won't single out particular online operators (who don't in any case generally advertise the consumer price of their games) but from looking (again, unsystematically) at what is being offered on Internet slot platforms average consumer prices, after rebates and other give backs, average 2 percent to 3 percent of handle, substantially lower than the state-licensed machine gaming summarized in Table 1.

The Online Market: Highly Competed, Fully Supplied

In 1999 and 2000 Internet gambling became a highly competed market. It seemed as though every kid with a penchant for gambling and the ability to raise a few hundred thousand dollars was licensing casino game software and heading to the land of sunshine and rum to open an Internet gambling site.

The gold rush flooded the online market with what an economist would call undifferentiated supply. In a commodity business (which e-casinos, all a mouse click away and all designed by a handful of software companies, certainly are) pricing is the only way to compete. Previously unheard of e-casinos were offering 50 percent, 100 percent and 125 percent givebacks to prospective players simply for establishing an account, bidding down the consumer price of online gambling in the process. And many operators, inexperienced in the nuances of gambling promotions, took it on the chin when these poorly conceived giveaways brought their theoretical win rate down to zero, or in some cases negative expectations of gain. The price war spread like wildfire around the e-gambling world and the average consumer price of gambling at many on-line casinos dropped substantially.

In economic terms downward pressure on the consumer price of gambling online is easy to justify. The Internet (most of the time) rationalizes differential pricing. In theory, this argument says, by creating a global marketplace the Internet forces prices (including sales taxes and gambling privilege taxes) down to some common global level. It is a good argument and in the case of the British betting levy it has worked this way in practice. The British betting levy, readers will recall, was a 9 percent tax levied on bets booked by the United Kingdom's licensed bookmakers. When early online bookmakers, like Sportingbet.com, set up shop in cyberspace, they didn't pay the 9 percent betting levy (since they weren't operating in the United Kingdom) and in many cases passed the price advantage thus created on to the consumer--thereby making the prices charged by Ladbroke, William Hill and other U.K. bookmakers look, to punters, unreasonably high. The denouement was swift. Britain's licensed bookmakers migrated offshore en masse, setting up price-competitive services in places like Gibraltar and Malta. The British government, faced with the prospective loss of both its betting levy revenue and its large, tax-paying, job-creating bookmaking industry, capitulated, abolished the 9 percent betting levy, replaced it with a profits tax, and said to its bookmakers, "All is forgiven, please come home."

In the case of the British betting levy, the new market force of the Internet spoke effectively. It rationalized prices (in this case a gambling privilege tax) to lower levels, thereby encouraging consumption (in this case betting, which, stimulated by the removal of the 9 percent betting levy, is up about 30 percent) and benefiting consumers.

The apparently low consumer prices of online gambling (compared to the consumer prices of equivalent forms of gambling at physical locations) may not be temporary phenomena. Online operators who price gambling above their competition are likely to run into online consumer price advisory services such as oddschecker.com, which provides guides to the lowest priced online sports gambling suppliers--in real time. And as Britain's betting shops learned, an established gambling franchise in the physical world offers no protection against price-cutting by online businesses operating under different tax regimes (or no tax regime) and different cost structures.

Still, we wonder if all e-gambling sites (particularly e-casino sites) are as price- competitive as some that we have seen. Without having the data to verify the statement, we think it is possible that online casino brands and online companies that have achieved critical mass, William Hill, Casino-on-Net, and Intercasino for example, have pricing power in the marketplace.

We also observe that economic theory and marketplace events don't always match up as nicely as they did in the case of the British betting levy. Earlier this week we had occasion to shop online for a wedding present: a secondhand ("used and rare" in the trade) book. Secondhand book dealers are fairly well organized online; we found a dozen copies of the volume we were looking for (Greece, illustrated by John Fulleylove, 1st ed., 1906, in the A. & C. Black (London) travel series) without much trouble. The book is not excessively rare; one would probably find at least one copy in most large cities, perhaps several, so we weren't surprised. What did surprise us was the variation in prices we encountered. First editions of Fulleylove's Greece, in condition good to very good, were priced online from a low of $71 to a high of $388. In other words, the most expensive copy we found was more than five times the price of the least expensive copy, for volumes in roughly comparable condition.

Differential pricing of this magnitude is something the global Internet marketplace is, in theory, supposed to smooth out. In theory, if a supplier in this global market is offering a book at $71 other suppliers in the same marketplace won't be able to sell the same book for $388. In practice, however, other suppliers are selling the same book for $388 and that, as we said, makes us wonder about the long-term prospects for differential pricing of online gambling compared to equivalent physical-location gambling. Time and market forces will tell.