THE GOUGE-EM STATE

The California Assembly and the California Senate have sent a bill to Governor Arnold Schwarzenegger that increases the takeout rate on exotic wages and legalizes exchange wagering. The latter permits one-on-one betting on a horse to win or lose and at odds negotiated between the bettors. The takeout rate hike would go into effect when Santa Anita opens on December 26, 2010 and exchange wagering would commence in May of 2012.

The takeout-grab part of the bill could be accurately described as the attempted mugging of bettors in the Golden “Gouge-em” State.

The current takeout on win, place, and show wagers in California is 15.43% at the racetracks and 16.77% at the fairs. These are to stay at their current levels. However, the takeout percentage on exotic bets with two interests—such as the exacta and the daily double—would rise from 20.68% to 22.68%. The takeout percentage on bets with three or more interests—the trifecta, superfecta, pick-3, etc.—would move from 20.68% to 23.68%. Supposedly, this redistribution from bettors to purses would increase the latter by up to $70 million annually.

This optimistic estimate for purse enhancement apparently assumes that the price elasticity of demand for California exotics is inelastic, meaning that the percentage decrease in handle will be less than the percentage increase in takeout. The increment in the takeout percentage on an exacta bet is 9.7% (2%/20.68%). If exacta handle decreases by less than 9.7%, then to some degree demand is inelastic. Similarly, the increase in the takeout on trifectas is 14.5% (3%/20.68%) and handle would have to decline by less than 14.5% for demand to be inelastic.

Products and services with an inelastic demand curve have a strong competitive position:  they may be quasi-monopolies and have no close substitutes or they are perceived to be so much better than the competition that people are willing to pay more to obtain them. For example, insulin for diabetics has an inelastic demand and so do tobacco and alcohol products, which is why governments choose to tax tobacco and alcohol to build sports stadiums and arenas. Another example: People compete vigorously to pay dearly for the privilege of attending an Ivy League school because of the perception–right or wrong–that doing so is worth it (a Wall Street Journal feature article of September 13, 2010 reported findings from its extensive survey of major corporate recruiters concerning which 25 colleges and universities graduate students that these companies most prefer prefer to hire. State universities dominated the rankings with 19 of the 25 placings and Cornell was the only Ivy League school that made the list. Not one prestigious and expensive liberal arts institution was in the 25.)

The assumption that California exotics wagering has an inelastic demand is likely untrue because California exotics have close and readily available substitutes. With the exceptions of the Triple Crown events and some other premier races and race meets, the pari-mutuel product is largely fungible or interchangeable. Bettors generally don’t perceive significant differences in races offered at various racetracks. And the “whales” or the biggest bettors on horse racing are keenly aware of takeout rates and gravitate to where they can get the lowest takeout percentages and rebates on their accumulated betting dollars. In fact, many give up betting on racing altogether and opt for the more takeout-friendly sports betting and table games (the effect of cross elasticity of demand).

Unlike whales, recreational horse-racing bettors may not keep track of pari-mutuel takeout rates, but many eventually realize that they can get a better return on playing blackjack or placing a wager on an NFL game. Or they simply conclude that betting on racing is a sucker’s deal. Racetrack commissions of 23 cents or 24 cents on the betting dollar are obviously confiscatory and many recreational bettors come to recognize as much.

If demand for exotic wagers in California proves to be elastic rather than inelastic, then California purses will be lower than before the takeout percentages were increased. That could very likely turn out to be the case.

California’s betting exchange would accept wagers from California residents on races anywhere in the world. Out-of-state residents will be able to wager only on California races. Exchange wagers are typically accepted solely on win and place bets and the takeout is normally two to five percent, depending on how much a bettor wagers over a specified period of time. California is on the cutting edge with exchange wagering in the United States. Yet the takeout rate will have to be competitive in order for the exchange venture to be a success.

Copyright © 2010 Horse Racing Business

Comments

  1. Thank you Professor Shanklin for calling it:

    If demand for exotic wagers in California proves to be elastic rather than inelastic, then California purses will be lower than before the takeout percentages were increased. That could very likely turn out to be the case.

    _____________

    As a regular customer of Northern and Southern California, I am disappointed in what is another mistake by the leaders in that state.

    It is a near certainty that handle figures will continue to fall (save for the blips for when dirt racing returns). Aggravating the mistake is the fact that is that we will have to wait 3 or 4 years before this scheme is proven to be a failure.

    Just like the advent of synthetics was sold as the greatest thing” for California racing”, I am sure there will be a migration of more wagering dollars to the other signals as a result of this move.

    To rectify the situation in the year 2015 I predict the CHRB will apply yet another band-aid to the racing there.

    IF there are any horses left there to race at that point.

  2. The racing managers and regulators in California keep making the same mistake while employing an unconscious conflict of interest,getting legislation for bigger purses at the expense of the horseplaying public. Purses were boosted a few years ago by SB27,$40 million, and all it did was allow the horsemen to buy more expensive horses and drove the costs to maintain a horse to new highs in California. Now, they ask for another $70 million for purses and further drive the business model bankrupt.

    The betting public does not care how much the purses are, they want a contest with value and want to bet on the fastest horse today.

    All of this by legislative means while hiking the price artificially with a poor product to the customers.

    The people love horse racing, they do not love the way it is being run

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