Archives for October 2009


Game theory is a topic of study in economics that focuses on the behavior of individuals (or organizations) in strategic situations wherein the success of one individual is contingent on the actions taken by another individual. In its purist form, game theory is based on mathematics. Game theory was pioneered by John von Neumann and Oskar Morgenstern in their 1944 book Theory of Games and Economic Behavior. Since then, eight people have won the Nobel prize in economics for their research in game theory.

One of the concepts from game theory is the prisoner’s dilemma. Typically, it is illustrated in a vignette similar to what follows and from which its name derives: Two men who have been charged by a prosecutor with being partners in a crime. The men are in separate jail cells and cannot communicate with one another. The prosecutor does not have sufficient evidence to convict them on the most serious charges against them and therefore needs one alleged criminal to testify against the other. The prosecutor offers each prisoner the same deal: if the prisoner testifies against his partner, he will go free and his partner will do about eight years behind bars. However, if both prisoners refuse to testify and remain silent, both of them will get a light sentence of six months in jail for a lesser crime. Finally, if each agrees to testify against the other, each will get a four-year sentence. In this hypothetical, each prisoner must determine whether he will betray his partner or cooperate with his partner by remaining silent.

The prisoner’s dilemma captures the situation that companies can find themselves in whenever an industry has two major competitors of nearly equal strength in the marketplace, such as Coca-Cola and Pepsi.

The dilemma is that Coca-Cola and Pepsi have two choices: each can attack the other, say through comparison advertising or aggressive price cutting, or each can choose to cooperate (without collusion, which is illegal) by going along with what the other is doing in the marketplace and thereby maintaining the market share division between the two. The problem is that each does not know what the other will do, so it is safer to go along with the less-than-satisfactory status quo than it is ideally to try to seize market share from the other.

Sotheby’s and Christie’s control about 90% of the fine art auction business. These two powerhouses have long been in a prisoner’s dilemma. Their answer was a six-year scheme to collude and fix commissions. The end result was a legal proceeding that in 2001 saw Sotheby’ former chairman Alfred Taubman sentenced to jail for a year and a day for his part in the conspiracy and there was a $512 million settlement to defrauded customers in a class action suit. This case became a topic for the television show Dominick Dunne’s Power, Privilege, and Justice.

The purchase of Fasig-Tipton in 2008 by Dubai-based Synergy Investments—a company headed by a close associate of Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister and Vice President of the United Arab Emirates and the Ruler of Dubai—is intensifying an already existing prisoner’s dilemma. Fasig-Tipton and Keeneland, like Sotheby’s and Christie’s, control the lion’s share of the auction market for Thoroughbred bloodstock. In addition, Synergy Investments has the monetary wherewithal to make Fasig-Tipton much more formidable.

One problem for Keeneland and Fasig-Tipton is that they are both competing with their own customers. In Keeneland’s case, it is competing against a company (Fasig-Tipton) affiliated with the best customer it has ever had, Sheikh Mohammed of Dubai. As for Fasig-Tipton, anytime it sells a horse to Sheikh Mohammed or his associates, it comes at the expense of the under-bidders, which means, ipso facto, that Fasig-Tipton ownership has deprived a customer. On the other hand,  if someone outbids the Sheikh or his associates, he or she has likely overpaid.

The long-term outcome of the prisoner’s dilemma in which Keeneland and Fasig-Tipton find themselves is problematic. Were you the chairman of Keeneland, would you accommodate your rival Fasig-Tipton by, say, leaving commissions at present industry-wide levels, or would you betray Fasig-Tipton by defecting from the arms-length arrangement and cut commissions, at least on certain highly coveted horses? The same question can be asked of Fasig-Tipton. Even if one acts secretly in discounting commissions, the penalty may be severe if the information gets out, which it very well may, as the competitor is likely to play a game of tit-for-tat and retaliate. Lower commissions leave both companies worse off (but are to the advantage of customers). Similarly, would you attack your rival in advertising and personal selling presentations, or would you refrain from doing so because you are unsure how your rival will react?

The answer to these kinds of queries is that in a classic prisoner’s dilemma, whether it be Coca-Cola vs. Pepsi or Fasig-Tipton vs. Keeneland, the greater likelihood is that a steady state will be maintained. Optimally, one firm would like to drive the other out of business but–uncertain what the rival will do–accepts a sub-optimal state of affairs. Keeneland would be very hesitant to act unilaterally, in say cutting commissions, without knowing how Fasig-Tipton would react, and vice versa. Collusion a la Sotheby’s and Christie’s is illegal and out of the question for moral and ethical executives, or for those who are tempted to collude but fear getting caught.

The prisoners in a duopoly will often be reluctant to do anything to rile up the opponent. However, there is the chance that Fasig-Tipton and/or Keeneland will defect from their arms-length understanding by betraying the other. In that event, the competition in the Thoroughbred auction business will become white-hot.

Copyright © 2009 Horse Racing Business


The Fasig-Tipton yearling sale in Saratoga Springs, New York, was once the premier Thoroughbred auction in the United States and arguably in the world. Man o’ War is its most famous graduate. However, during World War II, in 1943, the federal government restricted rail transportation and Kentucky breeders sold their yearlings at a Fasig-Tipton sale held in a tent on the grounds at Keeneland in Lexington, Kentucky. This fortuitous foothold allowed Keeneland to start its own auction company. Keeneland eventually supplanted Fasig-Tipton as the premier venue to sell Thoroughbreds and it has not relinquished that unofficial title. Factually, based on several performance criteria, Keeneland can legitimately claim to be uno numero.

Now, that claim is being challenged by a new sheriff in town, a high roller of immense proportions.

In 2008, Fasig-Tipton was sold to Dubai-based Synergy Investments. This company is headed by a close associate of Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister and Vice President of the United Arab Emirates and the Ruler of Dubai. Sheikh Mohammed of Darley Stud is one of the two leading Thoroughbred owners and breeders in the world, along with the John Magnier-owned Coolmore empire headquartered in County Tipperary Ireland. Sheikh Mohammed has spent astronomical sums for racing and breeding stock that have been purchased at public auction and privately. His ownership of farms spans several continents.

Executives of Synergy Investments have been quite open and adamant that Synergy will return the Fasig-Tipton Saratoga sale of select yearlings to its place as the foremost auction of its kind. Synergy has commenced to expand and remodel the auction facilities, is aggressively  promoting the sale, particularly to international buyers, and is recruiting higher quality yearlings.

Opening night at the 2009 Saratoga Selected Yearlings sale in August was more crowded than I have ever seen it and the environment was electric with Sheikh Mohammed himself in the crowd. In spite of the economic malaise that has driven down prices at Thoroughbred sales around the globe, the Saratoga auction’s gross revenue, average price and median price were up over 2008 by 45.6%, 11.1%, and 9.9%, respectively. The revenues and average figures were the second highest in the Saratoga sale’s storied history and the median was a record. The percentage of yearlings not sold fell from 25.6% in 2008 to 22%. Hall of Fame trainer D. Wayne Lukas commented that the overall quality at this year’s sales was the best he has seen at Saratoga.

John Ferguson, Sheikh Mohammed’s bloodstock agent, bought 12 yearlings that constituted 22.6% of the auction’s gross and included four of the sale’s five seven-figure yearlings. (Ferguson was also the leading buyer at Fasig-Tipton’s July 2009 select yearling auction in Lexington.) In addition, buyers closely aligned with Sheikh Mohammed, such as his brother Sheikh Hamdan, made significant purchases. International connections bought yearlings that accounted for 43.1% of the gross revenues, up from 20% in 2008. This may be indicative of how strongly Sheikh Mohammed will support Fasig-Tipton and of how well the company’s muscular sales and marketing strategy is working.

As corroboration of Fasig-Tipton’s already growing cachet, Forbes magazine’s special issue (October 19, 2009) on “The Richest People in America” cites the 2009 Fasig-Tipton Selected Yearling Sale (rather than a Keeneland sale) as a barometer of what Forbes calls “The Price of Ultraluxury.”  Forbes wrote:  “Our price index of luxury goods rose [since 2008] 1% versus a 1.5% drop in inflation.  Here are the items that have the largest percentage changes.”  Under “Biggest Percentage Increases,” were four items, including the aforementioned Fasig Tipton sale:  “With roots back to 1917, this auction had total proceeds soar 46% to $52 million.  That is the second highest in its history, behind the $62 million posted in 2001.”

The powers that be at Keeneland privately have to be looking at these developments with trepidation. Sheikh Mohammed, the best customer that Keeneland has ever had, is now part of a contingent that has openly declared its goal to have the Fasig-Tipton Saratoga Selected Yearling sale displace Keeneland as the leading venue to sell the most fashionable bloodstock. Fasig-Tipton in Lexington, long a second banana to Keeneland, will undoubtedly join the fray.

Keeneland’s dilemma: How does its management and sales force handle the nascent onslaught by a deep-deep-deep pocketed competitor that also happens to be its most important buyer ever? When the Keeneland people go out to recruit yearling sellers they will, as sales reps, have to persuade these sellers that Keeneland is a better choice than Fasig-Tipton. Keeneland may not explicitly comment negatively on Fasig-Tipton, at least not initially, but at some point it will have to do so when it tells sellers of the pros and cons of Keeneland vis-à-vis Fasig-Tipton. That is fundamental to personal selling 101.

A duopoly—a market dominated by two major players—can be as dog-eat-dog as any. Keeneland vs. Fasig-Tipton has the potential to be the Coca-Cola vs. Pepsi of Thoroughbred auction sales. When Fasig-Tipton begins to increase its market share of the most regarded yearlings, competition will naturally escalate accordingly.

Sheik Mohammed (and his friends and associates) will no doubt continue to patronize Keeneland for top-class yearlings. But he will also do a lot of business at Fasig-Tipton, and this should have a domino effect as shown by the dramatic increase in buying by international interests at the 2009 Saratoga select yearling sale. Fasig-Tipton has already begun to establish the reputation as being the “Sheikh’s sale.” This name recognition is a powerful magnet for global yearling sellers and buyers.

The winners in the upcoming Keeneland/Fasig-Tipton battle royal will be yearling sellers and buyers, who always benefit from strong competition for their business. Long-time loyalty to Keeneland or Fasig-Tipton will matter not, as sellers gravitate to where they can do the best business.

The folks at Keeneland are in close to a catch-22 situation in that they can’t win for losing. Businesses cater mightily to their best customers and forcefully battle their competitors. This is the prototype unless the best customer and the leading competitor happen to be one and the same. Keeneland and Fasig-Tipton may declare their intent for “cordial competition” but the devil will be in the details.

A day will come, sooner rather than later, when both groups covet an impeccably bred yearling with upper-seven-figures potential…and the gloves will come off.

Over the next several years, look for Keeneland’s market position to weaken and Fasig-Tipton’s to strengthen.  Then the two auction houses will settle in near parity like Christie’s and Sotheby’s in the fine art business. 

Copyright © 2009 Horse Racing Business


“Sometimes I wonder whether the world is being run by smart people who are putting us on, or by imbeciles who really mean it. “– Mark Twain

Kentuckians are famous for their feuds. The current imbroglio over the pros and cons of legalizing slot machines at racetracks is a doozy. Yet all of the vitriol and finger pointing has only exacerbated the situation and hardened the resolve of the opposing sides.

During the debate, the lightning rod has been Senate President David Williams, whose anti-slots position has kept enabling legislation from being considered by the full legislature or put to a vote of the public. Williams, a Republican, has alienated many Republican Party loyalists. For example, the Farish family, which operates Lane’s End Farm in Kentucky and Texas, has about as deep of roots as one can get in the Republican Party, with Will Farish serving as President George W. Bush’s Ambassador to Great Britain and his son Bill Farish working in the administration of President George H. W. Bush.

The Paulick Report and the Blood-Horse magazine last week both carried a lengthy letter to the editor from Bill Farish. He wrote, in part:

“As a lifelong Republican, and a member of a Kentucky family that has worked on behalf of the Republican Party and Republican administrations, I can say without reservation that protecting our signature industry is not a partisan issue. In fact, the Republican Party should be standing up for Kentucky businesses, Kentucky jobs, and a free market environment that would allow Kentuckians to fairly compete with their out of state competitors. Due to Senator Williams’ utter mismanagement, this issue now pits Republicans against Republicans, not Republicans against Democrats, as he would have us believe…Government interference with Kentucky businesses and job creation does not sound like any Republican philosophy I am familiar with.”

Senator Williams responded to Mr. Farish in the Paulick Report:

“I never cease to be amazed by the manner in which slot interests and their spokesmen such as Bill Farish continue to mislead Kentuckians. The proposed expansion of gambling in Kentucky is bad economic policy for the state and for the horse industry. Those tied to the slots may do their best to raise the specter of false divisions and false hope, but the reality of the situation is unchanged.”

Then Senator Williams cited and elaborated on what he called “facts.” For brevity, I have omitted the elaboration, as the reader can find it in the Paulick Report (click here).

“Fact #1: Expanded gambling will flood Kentucky with funds that will skew our body politic.

 Fact #2: Once slots arrive, horse-owners and trainers will get the short end of the stick.

Fact #3: Slots will not save Kentucky’s budget.

Fact #4: The horse business is beset with problems endemic to the industry itself.”

In other venues, Senator Williams has expounded with different rationale on why he thinks slots are not in the best interests of the people of Kentucky.

Although a couple of these reasons have merit, on the whole, there is a divide a mile wide between the core principles of the Republican Party and what Senator Williams has been saying and how he has been acting by bottling up a slots bill in committee.  Objective observers, of any political persuasion, would agree that the Republican Party professes to stand for the pillars of limited government, a strong national defense, free-market entrepreneurial solutions to problems, deregulation, and leaving people alone to make their own choices. Therefore, all Kentucky Republicans, not just those in the racing industry, must wonder about the controlling behavior of Senator Williams, who has been aided and abetted by many of his elected Republican party colleagues in the state Senate.

In the past several decades, the Republican Party at the national level has had an uneasy alliance between traditional “economic libertarian” Republicans and “social conservative” Republicans. The latter do not subscribe as strongly to the idea of empowering people to make their own choices and decisions, especially when so doing conflicts with one of their deeply held moral or ethical beliefs. If Senator Williams were to stand aside and let Kentuckians render a decision about slots in a statewide vote, the devices would most likely be legalized, or so the polls indicate. This would not sit well with the social conservatives who Senator Williams is ostensibly placating.

I would not be so presumptuous as to make a judgment here on which side of the slots issue has the moral high ground. My point is that there is often a “values” dichotomy between what “libertarian/economic” Republican voters hold true versus what “social conservative” Republicans believe.

As a result, there will be an impasse as long as Senator Williams, evidently a social conservatives advocate, is in charge. Note from the Senator’s responses in the Paulick Report that he is inclined to divine, with considerable surety, what is best for Kentuckians and for the horse industry:  “The proposed expansion of gambling in Kentucky is bad economic policy for the state and for the horse industry. ” Senator Williams’ all-knowing attitude and schoolmaster approach has the tenor of elitism and is much closer to a “nanny state” philosophy than it is to the overarching principles of the GOP.

Given this impasse, a route to resolving the slots issue, one way or the other, is the method being pursued by Kentucky Governor Steve Beshear, which is to campaign to replace the Republican majority in the Senate. As an incumbent governor from the Democratic Party, who rode into office on the promise of expanded gambling, Mr. Beshear has the right and obligation to do so.  However, he has been criticized by some prominent members of his own party for weak and ineffectual leadership, most notably for failing to make expanded gambling the top priority in the first legislative session after his election.

Another avenue is more expedient in that Republicans control the Senate now. Republican senators can simply decide to revert to the bedrock Republican principle of trusting their constitutents to choose what is best. This is perfectly consistent with the Republican preference for, say, freeing people to decide how to spend their own money, via tax cuts, instead of maintaining higher tax rates and leaving it to politicians and bureaucrats to allocate.

A Republican senator in Kentucky, including Mr. Williams, can take the position that, while he or she may be personally opposed to slot machines being legalized, the majority opinion of Kentucky voters shall prevail. In other words, “I find gambling to be repugnant, or inadvisable policy, but I hold sacrosanct the prerogative of the citizenry to make such an important decision.”

What is needed to solve the slots issue in Kentucky is not a revolt of Republican senators, but rather, a coming home to the principles that embody the party of Lincoln, Theodore Roosevelt, Eisenhower, and Reagan. Republican senators should matter-of-factly tell Senator Williams that it is no longer acceptable—in fact, it is anathema—to go on substituting his judgment for that of Kentucky voters about what is right for the Commonwealth…even if he ultimately is shown to be correct in some of his views.

It is terrribly condescending for Senator Williams to fear that Kentuckians will be “mislead” by “slots interests” and to assert that “Expanded gambling will flood Kentucky with funds that will skew our body politic.”  Constituents are intelligent enough and discerning enough to sort out what is best. They do not need any government official deciding on their behalf and they certainly do not need to be shielded from out-of-state messages in the media. In effect, the Senator is saying that the voters of Kentucky are naive and that their elected officials in the legislature will be swayed by money.

U. S. Senator Mitch McConnell, the highest ranking Republican in the United States Senate and a longtime close  friend to horse racing and breeding, needs to bring pressure to bear, so as to ensure that if Kentucky’s flagship industry and main tourist attraction is to atrophy, it won’t be because of the objections of a single state senator, who just might be mistaken.

Senator Williams himself deep down surely would welcome a face-saving resolution to this contentious issue.  All sides to the slots brouhaha could stick to their positions and maintain their dignity by simply agreeing to submit the question to a plebiscite. Subsequently, the losing side can say with sincerity, “The people have spoken and I respect their decision.”  That is the spirit of a government of the people, of a republic with a lower-case r.

If GOP senators in Kentucky were to start acting like Republicans, the slots controversy would soon be settled.

Copyright © 2009 Horse Racing Business