WHAT IF TAKEOUT RATES ON PARI-MUTUEL WAGERING WERE DRASTICALLY REDUCED?

This is a follow-up post to:

“The Withering of U. S. Pari-Mutuel Handle” on August 30, 2013.

“Pari-Mutuel Handle, Purses, and Yearling Auction Prices, August 23, 2013.

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Fact: The current state takeout rates on horse racing wagers in the United States are uncompetitive when compared to popular alternative skill-based gambling products.

Proposition: Takeout rates on U. S. horse racing are economic disincentives and have been steadily destroying demand for the pari-mutuel product, as evidenced by the sharp and continuing downward trend (in real and inflation-adjusted dollars) in the amount of money (handle) bet on horse racing.

Analysis: For illustrative purposes, consider a fictional racetrack/advance deposit wagering company called Regis Downs and some basic (and necessarily very simplified) assumptions.

Regis Downs ends up 2013 with handle of $557.1 million from all sources. Straight wagers account for 35% of handle and exotic wagers for 65% of handle. The average takeout rate on straight wagers is 16% and the average takeout rate on exotic wagers is 19%. The blended takeout rate is (.35)(.16) + (.65)(.19) = .1795 or 17.95%.

Net Revenues for 2013 = $100 million ($557.1)(.1795).

In 2014, Regis Downs is considering reducing the takeout rate on straight wagers to 10% (in order to become competitive with the rake on sports betting) and lowering the takeout rate on exotic wagers to 13%. This represents decreases of 37.5% on straight wagers (6%/16%) and 31.6% on exotic wagers (6%/19%). The new blended takeout rate (assuming that straight wagers still account for 35% of all handle and exotic wagers account for 65%) is (.35)(.10) + (.65)(.13) = .1195 or 11.95%.

(The demand for straight wagers is likely to be more sensitive to changes in the takeout rate than is the demand for exotic wagers. If that is the case, reducing the takeout rates would change the assumed 35%/65% division of handle between straight wagers and exotic wagers.)

Under the 2014 assumptions, Regis Downs would need to increase handle to at least $836.82 million to maintain 2013 net revenues of $100 million (.1195x = $100 million = $836.82 million). This would represent a 50.2% increase in handle from 2013 to 2014.

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Question:  Would reducing takeout rates by 37.5% on straight bets and 31.6% on exotic wagers lead to at least a 50.2% increase in handle? (This implies that price elasticity of demand would need to be around -1.5).

Answer: First, it depends largely on the price elasticity of demand (i.e., how sensitive is quantity demanded to changes in price) for pari-mutuel wagering in general and the Regis Downs pari-mutuel offerings in particular. Second, it depends to some degree on cross elasticity of demand, which measures the responsiveness in the quantity demanded of one product (i.e., gambling products other than pari-mutuel wagering on horse racing) when a change in price takes place in another product (i.e., pari-mutuel wagering on horse racing). Sports betting and pari-mutuel wagering are to some extent substitutes for one another. Third, it depends on how aggressively and effectively Regis Downs disseminates the information about the reduced takeout rates and reaches out to potential customers.

This question/answer is discussed in more specifics in a Horse Racing Business post within the next several weeks.

Copyright © 2013 Horse Racing Business

Comments

  1. Bill

    Interesting post.

    Reaching that $836m would probably also depend on the ability of the fictional racetrack to card more 10-12 horse race fields and less 6-8 horse fields which can be a bit of a chicken/egg situation as it usually requires higher purses to attract a larger field.

    Personally I think that racetracks should start paying prizemoney based on handle and field size. Have a set minimum, but if it is a 12 horse field with a high handle then the racetrack could either elect to retroactively pay down to last place (thus rewarding all participants) or pay additional prizemoney out based on the percentages of the race. Competitve races with high handle would get rewarded the most and trainers/racing administrators would be less likely to card or enter for a race that was only going to go with 6 runners.

  2. The multitude of head-winds racing is running into in the market are collectively more impactful than price. I suspect demand is not very elastic. Reducing takeout will unfortunately have a negligible effect on handle.

  3. Many racetracks have temporarily cut takeout on some bets and demand has rocketed. The proof is there.

  4. Bill Shanklin says

    Byron,

    You are correct about the effect of field size on handle and I will be publishing some empirical data on that subject in a month or so.

  5. Bettors seek value. The greater the perceived value the greater the handle on any particular race. As value is a function of takeout and field size, a relationship between takeout and field size should be established. I propose a sliding takeout scale based on betting interests. For example, a straight pool takeout rate of 1.5 percent per betting interest with a max takeout of 15% and a 2 percent rate per betting interest in the exacta pool with a max takeout of 20%.

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