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Competition and Monopoly in the Market for Pari-Mutuel Bets — A Theoretical Approach

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  • Herbert Walther

    (Vienna University of Economics and Business Administration)

Abstract

An intertemporal state dependent expected utility model (generating S-shaped probability weighting by incorporating anticipated flows of utility from elation and disappointment) is used as a framework for analyzing the demand for various gambles. The analysis is extended to compare pari-mutuel bets under competitive and monopolistic conditions. The following conclusions can be drawn: (1) A monopoly fosters the `skeweness' of the pari-mutual bet: In equilibrium, the wager and the demand for probability to win are lower, while the wager per unit of probability to win and the prize are higher. (3) If prize expectations are endogenous, rollovers might be a necessary device to prevent instability. (4) Rational gamblers will be indifferent between `wager tax' and `bank holder' type methods of raising monopoly profits.

Suggested Citation

  • Herbert Walther, 2008. "Competition and Monopoly in the Market for Pari-Mutuel Bets — A Theoretical Approach," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 61-78, September.
  • Handle: RePEc:buc:jgbeco:v:2:y:2008:i:2:p:61-78
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    More about this item

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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