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Economics of Gambling: Price, Demand, and Consumer's Surplus

This article explores the relationship between price, demand, and consumer's surplus in the economics of gambling. It also examines addiction and profit in competitive and uncompetitive gambling markets.

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Economics of Gambling: Price, Demand, and Consumer's Surplus

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  1. POLECG23/01/2018Notes from book Economics of gambling and graphs to clarify our themes

  2. Price and demand of gambling • Definition of price in gambling variates between game types, but normally the base idea is that price equals the “house advantage” or equally Wager minus expected value of lottery P = W - E[V] (e.g. Economics of Gambling, p. 38) • Empirical studies support that price elasticity is negative (higher price => lower demand) in gambling (e.g. Economics of Gambling, p. 624-626, 42) => Negative slope for demand curve

  3. Consumer’s surplus in gambling • In basic analyses consumer is assumed to have quasi-linear utility function (reservation prices (= max. sum what consumer would pay to consume quantity q good x) are independent of the amount of money the consumer has to spend in other goods). This is assumed when modelling the partial market equilibrium. (Varian, p. 252) • Consumer is expected to gain some satisfaction (utility) regardless of winning or losing (Economics of Gambling, p. 642) • Consumer’s surplus can be defined as the utility minus the reduction in the expenditure on consumption of the other goods. (Varian, p. 249)

  4. Consumer’s surplus Consumer’s surplus Price Quantity demanded

  5. Consumer’s surplus in gambling • In the case of gambling markets, it is crucial to have tools for analysing addiction. • We can think that addict overconsumes with every price p = w - E[v]in comparison to his/her “underlying” or “real” preferences. Australian Productivity Comission (1999) (Economics of Gambling, p. 643) P DAddict DReal QReal QAddict

  6. Competitive gambling market in partial equilibrium: Average Cost Marginal Cost Producer’s surplus = Revenue – Variable Costs Price = W – E[V] Variable costs Producer’s Surplus Total costs Average Cost = Price <=> Profit = 0 Average Fixed Cost Fixed costs

  7. Uncompetitive gambling market in partial equilibrium: Average Cost Marginal Cost Price = W – E[V] Account Profit Total costs Let’s take closer look in here Positive profits in partial equilibrium of gambling market can be due to: * Government regulation (=> rent) * Naturally uncompetitive market Average Fixed Cost

  8. Different ways to divide GGR GGR GGR GGR Net Contribution Account profit T Indirect Costs Contribution Margin Total costs Variable Costs C Direct Costs Fixed costs Direct Taxes

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