REPORT ON UNDUE ECONOMIC CONCENTRATION ANALYSIS RELATED TO THE PROPOSED MERGER OF ELDORADO AND CAESARS IN ATLANTIC CITY, NEW JERSEY May 2020 MARTIN K. PERRY Bates White, LLC Table of Contents I. Scope ................................................................................................................................................................... 1 II. Biographical information...................................................................................................................................... 2 List of Figures Figure 1: 11 Criteria Shares by Casino ................................................................................................................. 10 Figure 2: 2019 Concentration levels using each of the criteria in the Act .............................................................. 11 Figure 3: Atlantic City Concentration by Measure (1980–2019) ............................................................................ 13 Figure 4: Trends in Casino Percentage on Quarter Slot Machines ....................................................................... 21 Figure 5: Trends in Casino Percentage on Dollar Slot Machines (1978–2019)..................................................... 23 Figure 6: Industry Trends in Casino Percentage on Slot Machines by Denomination (1978–2019) ..................... 25 Figure 7: ........................................................................................ 29 Figure 8: ... 30 Figure 9: Trends in Promotional Allowances and Expenses Relative to Casino Drop (1978–2019) ..................... 34 Figure 10: Trends in Casino Drop by Casino (1978–2019) ................................................................................... 35 Figure 11: Trends in Promotional Allowances by Casino (1978–2019) ................................................................. 36 Figure 12: Trends in Casino Win per Square Foot (1982–2019)........................................................................... 38 Figure 13: Bally’s Capital Expenditure (1978–2019) ............................................................................................. 43 Figure 14: Caesars Capital Expenditure (1978–2019) .......................................................................................... 44 Figure 15: Trends in Net Revenue (1978–2019) ................................................................................................... 46 Figure 16: Casino Slot Machine Drop for Pennsylvania within 150-Mile Radius of Atlantic City and Atlantic City (2011–2019) .................................................................................................................................................. 51 Figure 17: Casino Slot Percentages by Geography (2000–2019) ......................................................................... 52 Figure 18: Pre- and Post-Merger Industry Concentration for the 11 Criteria ......................................................... 56 Figure 19: Industry Concentration for Potential Divestitures Using the 11 Criteria................................................ 61 List of Tables Table 1: Operating Casino Floor Space (1978–2019) ......................................................................................... B-6 Table 2: Available Hotel Room Nights (1993–2019) ......................................................................................... B-13 Table 3: Net Revenue with Market Shares (1986–2019) (in thousands of USD) .............................................. B-18 Table 4: Growth Rates for Net Revenue (1987–2019) ...................................................................................... B-24 Table 5: Casino Drop for Table Games (1978–2019) (in thousands of USD) ................................................... B-30 Table 6: Casino Drop for Slot Machines (1978–2019) (in thousands of USD) .................................................. B-37 Table 7: Casino Percentage on Slot Machines, 1 and 2 Cent (2005–2019) ..................................................... B-44 Table 8: Casino Percentage on Slot Machines, Nickel (1978–2019) ................................................................ B-47 Table 9: Casino Percentage on Slot Machines, Quarter (1978–2019) .............................................................. B-54 Table 10: Casino Percentage on Slot Machines, Fifty Cent (1992–2019) ......................................................... B-61 Table 11: Casino Percentage on Slot Machines, Dollar (1978–2019) ............................................................... B-66 Table 12: Casino Percentage on Slot Machines, Five Dollar (1992–2019) ....................................................... B-73 Table 13: Casino Percentage on Slot Machines, All Denominations (1978–2019) ........................................... B-78 Table 14: Casino Percentage on Slot Machines, Other States (1992–2019) .................................................... B-85 Table 15: Casino Percentage on Pennsylvania Slot Machines within 150 Mile Radius of Atlantic City (2010– 2019) ................................................................................................................................................................. B-86 Table 16: Casino Drop for Pennsylvania Slot Machines within 150 Mile Radius (2010–2019) (in thousands of USD) ................................................................................................................................................................. B-87 Table 17: ............................... B-88 Table 18: Promotional Allowances and Expenses Relative to Casino Drop (1978–2019) ................................ B-91 Table 19: Casino Win Per Square Foot (1978–2019) (in USD per square foot)................................................ B-98 Table 20: Pennsylvania Casino Win for Slot Machines and Table Games within 150 Mile Radius of Atlantic City (2006–2019) (in thousands of USD) ........................................................................................................ B-105 Table 21: Sports Wagering and Internet Gaming Win, Pennsylvania within 150 Mile Radius of Atlantic City vs. Atlantic City (2014–2019) (in thousands of USD) ...................................................................................... B-107 Table 22: Capital Expenditure (1978–2019) (in thousands of USD) ............................................................... B-108 Table 23: Casino Drop for Slot Machines in the Northeast (in billions of USD) ............................................... B-115 Expert Report of Martin K. Perry I. Scope (1) This report has been prepared for the Division of Gaming Enforcement (DGE) within the New Jersey Office of the Attorney General. The report details the findings of an undue economic concentration analysis regarding the proposed acquisition of Caesars Entertainment Corporation (CEC) by Eldorado Resorts, Inc. (Eldorado). I refer to this transaction throughout as the Eldorado-CEC merger. (2) Most of tables and calculations in this report are derived from the public information in the monthly and quarterly reports that casino hotels file with New Jersey regulators. The professional staff at the DGE have also assisted me in obtaining statistical information about the casino hotels. I obtained additional public revenue data for Pennsylvania casinos from the Pennsylvania Gaming Control Board website. (3) In preparing this report, I was assisted by Pauline Kennedy, an expert economist, and Benjamin Pierce, an economic analyst at Bates White, LLC (Bates White). While engaged in this matter, I directed the activities of this support team, made all final decisions concerning the analysis, and prepared this report. For my work in this matter, Bates White has billed my time at $850 per hour; its compensation does not depend on the outcome of this matter. (4) The tables provided in this report contain more information than is discussed in the text of the report. One purpose of providing these tables is to make more historical and current information about the industry readily available to the New Jersey Casino Control Commission (the Commission) and the public. (5) This report was submitted on May 27, 2020. Page 1 Expert Report of Martin K. Perry II. Biographical information (6) My name is Martin K. Perry. I received a PhD in Economics from Stanford University in 1976 and a JD from Rutgers University (Rutgers) Law School at Newark in 1984. I joined the Economics Research Group at Bell Laboratories in Holmdel, New Jersey, in 1976. That group was merged into the Economics Research Center at Bell Laboratories in Murray Hill, New Jersey, in 1978. I continued to conduct research in that center until January 1984, when I moved to the Economics Research Group at Bell Communications Research (Bellcore). I conducted research at Bellcore until I joined the Department of Economics at Rutgers in New Brunswick in September 1989. I was a Professor of Economics and Chair of the Department of Economics at Rutgers from June 1992 to June 1995 and again from June 1998 to June 2000. During 2004, I served as the Chief Economist of the Federal Communications Commission. From August 2011 to the present, I have served as Professor of Economics and Head of the Department of Economics at the University of Illinois at Urbana-Champaign. My full résumé is attached in Appendix A, at the end of this report. (7) My research has focused on vertical integration, vertical restraints, monopolistic competition, oligopoly,