If you want to operate the first legal casino in Boston, the chances are that you will have to win a bidding process...
A trend in the worldwide expansion of casino gambling is the adoption of a zoning merit model for issuing licences. This simply means that the jurisdiction considering legalising casinos first sets the number and/or sites for prospective casinos. After this, the government calls for requests for proposals (RFPs) by those companies interested in owning and operating a casino. After receiving proposals, the government then chooses between candidates based on experience, project specifications and other qualifications set forth in the RFP.
In practice, the granting of casino licences on an RFP basis has economic impacts and may result in fewer companies having the opportunity or resources to compete for licences or franchises in many jurisdictions.
The theory of market economics specifies a number of basic conditions needed for a market to set prices efficiently. The greater the deviation from these conditions, the less efficient the market system becomes. Most basic is the condition that markets must be competitive. Lack of significant barriers to entry into a market is a fundamental condition to a competitive market.
The gambling business does not have many natural barriers to entry. For example, gambling is not necessarily capital intense. You only need a pair of dice to run a craps game or a deck of cards to play blackjack. Likewise, casino gambling also is fairly fungible, with the exception of the few propriety games that exist. Similar dismissals of the other types of barriers to entry can be made with one exception.
Government restraints are a barrier to entry that can prohibit the casino industry from being a competitive market. Once the government sets barriers through licensing, the government itself limits entry. These barriers become absolute when the actual number of competitors is limited in absolute numbers.
Whether all governments adopting the RFP model understand the economic and regulatory ramifications of this model is unknown. Let\‘s take a large urbanised environment that wants to legalise casino gambling. This policy may make some sense from two major perspectives. Casinos can increase revenues/taxes from visitors and reduce lost revenues by its residents that are gambling in foreign jurisdictions.
As an example, Singapore decided that it wanted to increase revenues from visitors and that "iconic" casino developments were best suited to these purposes. The government was opposed to wide open gambling because it could impact the broader community and believed that limited licences are likely to attract more elaborate and expensive projects. To attract the best projects, Singapore adopted a classic RFP.
What are the economic ramifications of a decision to grant a single or a very few number of licences? After the licences are issued, besides limiting competition limited to a single or a very few providers, the sole or few licensees may be able to set monopoly or oligopoly pricing. All told, both resulted in a transfer of wealth.
Monopoly pricing in the casino industry means that the casinos can set prices on games by setting the odds. This may be accomplished through rule variations that are more or less favourable to the player, by altering the payoffs on certain wagers, or by offering a different type of game product. The house advantage determines in large part how much it costs a player to play a particular game. The casino can also increase the cost of playing a game by raising the house minimums.
Monopoly pricing results in market inefficiencies, which are that portion of the price paid by consumers over what the price of the product would be in a perfect competitive environment. Therefore, market inefficiencies harm the customer. In the casino industry, the customer is the patron who pays more to play the same games in a monopoly market as opposed to a competitive market.
Inefficiencies result in the redistribution of wealth from the casino\‘s customers, as represented by the extra money they pay to gamble, to other groups. The redistribution could accrue to the casino licensees that can earn positive economic profits by keeping competition out. It also could accrue to the government that obtains revenues through taxing the casino in an amount equal to or a percentage of the inefficiencies.
The wealth created by these inefficiencies may accrue to the benefit of the initial casino licensee in ways other than immediate direct profits from the gambling activity, which themselves can be staggering. For example, if the licensee decided to sell the casino, the price would be much higher than for a similarly-situated casino in a competitive market.
Because of its economic impact, governments should better understand the RFP model. The first is the proper valuation of the redistribution of wealth. By granting monopoly or oligopoly licensing, the government may presuppose that it can value the licences being transferred. This is a difficult burden for the government. For example, one Macau licensee sold a sub-licence to conduct gambling for $900mThis sub-license fee did not accrue to the benefit of the government or its citizens and may not have been factored into the original cost of the licence.
Governments may presume that an RFP bidding process will result in competitive pricing for the licences. Limited competition for licensing, however, is likely to skew competitive pricing. If the price is so high, and only a handful of powerful companies can even compete, you have at its core, limited competition in the first instance for the issuance of the licences.
A second issue is the need to have increased protections against corruption or undue influence on the political process. Assuming the casino companies understand the true value of the licence and that it is in the billions, powerful motivation exists to corrupt or influence the bidding process. This corruption can be as simple as directly or indirectly influencing official decisions by bribing government officials for their support. Casino companies are less likely to consider this option, as it would jeopardise their licences in other jurisdictions. More nebulous, however, is lawful influencing of the RFP process by the making of legitimate contributions to public or private causes that curry favour with government decision makers.
A third issue is fairness of the games to the customers. The zoning merit model results in the government both authorising non-competitive prices at the casino and directly benefiting through exorbitant taxes. This pricing not only results in the player paying more to play the games, but also assure that on average more players will lose on any given casino visit. Moreover, the disadvantages may not be transparent to the average player because pricing is not as evident in the casino as in other retail establishments. To counter this, government may decide to undertake price regulation. The problems with this approach, however, is that vetting prices will result in a decrease in the value of the wealth, partially accruing to the benefit of the government resulting from the market inefficiencies.
A fourth issue regarding the RFP model is the impact on regulatory oversight. Suppose a single licensee has invested several billion dollars in a facility, employs thousands of workers and contributes millions of dollars in tax revenues. The concern needs to be addressed as to the regulators\’ ability to revoke the licence for serious regulatory violations.
