The UK betting and gaming market: estimating price elasticities of demand and understanding the use of promotions A REPORT PREPARED FOR HM REVENUE AND CUSTOMS June 2014 © Frontier Economics Ltd, London. Her Majesty’s Revenue and Customs Research Report 313 © Crown Copyright 2014 Published by Her Majesty’s Revenue and Customs The views in this report are the author’s own and do not necessarily reflect those of HM Revenue & Customs. © Crown Copyright 2014 Copyright in the typographical arrangement and design rests with the Crown. This publication may be reported free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown copyright with the title and source of the publication specified. Published by HM Revenue and Customs, June 2014 www.hmrc.gov.uk iv Frontier Economics | June 2014 Contents Glossary 1 Executive Summary 2 Acknowledgements 6 1 Introduction 7 1.1 Background................................................................................ 7 1.2 Project methodology .................................................................. 9 1.3 Structure of the report .............................................................. 10 2 Literature review 12 2.1 Approach to the review ............................................................ 12 2.2 Own-price elasticities of demand ............................................. 13 2.3 Cross price elasticities of demand ........................................... 16 2.4 Promotions in the betting and gaming market.......................... 18 3 Econometric estimates of elasticities 21 3.1 Introduction .............................................................................. 21 3.2 Data ......................................................................................... 21 3.3 Estimation data set overview ................................................... 25 3.4 Descriptive account of estimation dataset................................ 26 3.5 Econometric approach ............................................................. 33 3.6 Model results............................................................................ 37 3.7 Preferred elasticity estimates ................................................... 45 4 The use of promotions in the gambling market 54 4.1 Background.............................................................................. 54 4.2 Approach.................................................................................. 54 4.3 Synthesis of findings ................................................................ 56 5 Overall conclusions 67 Bibliography 72 Appendix A: Full literature review 78 Tables & Figures Own-price elasticities of demand........................................................ 78 Cross price elasticities of demand ...................................................... 85 Promotions in the betting and gaming market .................................... 89 Appendix B: Descriptive statistics 100 Appendix C: Full econometric results 107 Appendix D: Topic guide for interviews 115 Appendix E: Short interview summaries 118 Interview #1 ...................................................................................... 120 Interview #2 ...................................................................................... 122 Interview #3a .................................................................................... 124 Interview #3b .................................................................................... 126 Interview #4 ...................................................................................... 129 Interview #6 ...................................................................................... 131 Interview #8 ...................................................................................... 134 List of figures Figure 1. Preferred elasticity estimates................................................ 4 Figure 2. Estimated UK gambling market by sector (GGY) ................. 8 Figure 3. Summary of project approach............................................... 9 Figure 4. Summary of estimation data set ......................................... 26 Figure 5. Summary of estimated own- and cross-price elasticities .... 39 Figure 6. Preferred elasticity estimates.............................................. 46 Figure 7. Preferred elasticity estimates.............................................. 68 Figure 8. Illustrative impact of revenue tax in competitive market with inelastic supply ............................................................................ 98 Figure 9. Terrestrial betting quantity and price................................. 100 Figure 10. Terrestrial gaming quantity and price.............................. 101 Figure 11. Lottery sales and price.................................................... 102 Tables & Figures vi Frontier Economics | June 2014 Figure 12. Scratchcard sales and payouts....................................... 103 Figure 13. B2 machines gross gaming yield and duty rates ............ 104 Figure 14. Remote betting quantity and price .................................. 105 Figure 15. Remote gaming quantity and price ................................. 106 Figure 16. Full results of preferred model for terrestrial betting ....... 107 Figure 17. Full results of preferred model for terrestrial gaming ...... 108 Figure 18. Full results of preferred model for terrestrial bingo ......... 109 Figure 19. Full results of preferred model for pools ......................... 110 Figure 20. Full results of preferred model for Lottery (draws) .......... 111 Figure 21. Full results of preferred model for remote betting ........... 112 Figure 22. Full results of preferred model for remote gaming .......... 113 Figure 23. Regression of scratchcard sales on lotto sales............... 114 List of tables Table 1. Glossary of acronyms and terms............................................ 1 Table 2. Response by gambling companies ...................................... 23 Table 3. Summary information about firms with which interviews conducted.................................................................................... 56 Table 4. Summary of evidence on own-price elasticity of demand for lottery games............................................................................... 79 Table 5. Summary of evidence on own-price elasticity of demand for casinos ........................................................................................ 81 Table 6. Summary of evidence on own-price elasticity of demand for machine-based gaming ............................................................... 82 Table 7. Summary of evidence on own-price elasticity of demand for betting.......................................................................................... 84 Table 8. Economic rationales for promotions in the gambling market 91 Table 9. Observational studies on promotions and gambling behaviour in casinos .................................................................................... 95 Tables & Figures Table 10. Summary information about firms with which interviews conducted.................................................................................. 119 Tables & Figures Glossary Table 1. Glossary of acronyms and terms Term Definition 2SLS Two-stage least squares (estimation approach for instrumental variables) EBITDA Earnings before interest, tax, depreciation and amortization, widely used measure of company performance FIML Full information maximum likelihood, estimation method used in particular when data are missing FOBT Fixed odds betting terminal, machine offering fixed odds bets (e.g. casino games) usually found in bookmaker shops GBD General Betting Duty GDP Gross Domestic Product GGY Gross Gaming Yield, measure of gross operator win from gambling (stakes less payouts) GC Gambling Commission HMRC Her Majesty’s Revenue and Customs IV Instrumental Variables, estimation technique when a variable is believed to be endogenous (determined within the model) OLS Ordinary Least Squares, common econometric estimation technique Parimutuel Pools-based betting where payouts depend on total stakes ROI Return on Investment Remote gambling Gambling conducted online or by telephone or other interactive means (e.g. interactive TV) SWP Skills With Prizes, type of machine-based gamble where prizes can be won (e.g. quiz machines) Terrestrial gambling Gambling conducted at a specific location (e.g. in a bookmaker, casino or bingo club). Glossary 2 Frontier Economics | June 2014 Executive Summary Introduction HMRC commissioned Frontier Economics to undertake research to produce price elasticity estimates for specific sectors of the UK gambling market, including both terrestrial (land-based) and remote (online) gambling. Specifically, we were asked to estimate own- and cross-price elasticities for eight sectors of the gambling market: Terrestrial betting; National Lottery (main-draw, scratchcards, online instants); Terrestrial gaming; Gaming machines; Terrestrial bingo; Pools; Remote betting; and Remote gaming. HMRC also commissioned Frontier Economics to analyse the types of promotions used by gambling companies, why these promotions are used, and how changes in gambling duties impact on gambling companies’ strategies regarding player promotions. Study objectives There were two main objectives of the study. First, to refresh HMRC’s UK gambling model which is used to cost