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Power, Not Fear: A Collusion-Based Account of Betting Market Inefficiency

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  • Alistair Bruce
  • David Marginson

Abstract

We examine racetrack betting market inefficiency. We argue that the overround -- an established measure of inefficiency -- may be seen as a reflection of bookmakers' collusive returns maximising behaviour, rather than simply as their response to an adverse selection problem. We test, and find empirical support for, several proposed market effects of bookmaker (market maker) collusion. Besides number of race participants, overround varies significantly according to (1) whether or not the race is the last at the race meeting, (2) racetrack location, (3) day of the week (weekday vs. weekend), (4) type of race (handicap vs. non-handicap), and (5) type of race event (Flat/National Hunt). The study provides fresh insight into the origins of betting market inefficiency, where the link between market structure and context and bookmaker behaviour is a key feature. Regarding the broader implications, the study alerts us to the potential for financial market inefficiencies such as the bid-ask spread to be explained, in part, as a consequence of market makers' opportunistic behaviour wherever and whenever it is possible for intermediaries to exploit their understanding of investor behaviour .

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  • Alistair Bruce & David Marginson, 2014. "Power, Not Fear: A Collusion-Based Account of Betting Market Inefficiency," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 21(1), pages 77-97, February.
    • Handle: RePEc:taf:ijecbs:v:21:y:2014:i:1:p:77-97
    DOI: 10.1080/13571516.2013.782982
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    References listed on IDEAS

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