Throughout most of China, gambling is illegal. In Macau, the former Portuguese city, gambling alone last year raised [Macau Pataca? US$? RMB?] 38 billion in casino revenue. Macau’s casino industry before 2002 was a monopoly run by the Ho family. After 2002 the government issued six permits decreasing the market share the Ho family held in Macau. Lawrence Ho plans to expand Crown casinos into international markets, including the Philippines, Japan, and Russia. Mr. Ho is currently lobbying the Japanese government to allow casinos in Tokyo and Osaka. According to Mr. Ho, the Chinese government wants to curtail the industry’s growth. By using a licensing system, the government can limit entry to the market. This keeps prices high for most monopolistic markets and quantity below that of a perfect market. The government could be limiting the number of consumers who gamble by not having perfect competition.
With the 2020 Olympic Games occurring in Japan, several casinos, including American companies, plan to open up Japan’s market to gambling. Japan’s population base is relatively wealthy, with an estimated market value of 10 billion and up for possible revenues. Casinos have several products that they offer to consumers. Shows, resorts, gambling, and alcohol are products casinos sell. Mr. Ho wants to differentiate himself from his father by focusing more on the resort aspects in Japan. The cities of Tokyo and Osaka have a strong tourist industry. By getting families and businessmen to stay in the resort hotel the Casino can then push their other products on consumers.
“The junior Ho said he does not gamble and would rather be known as “the person who built cool integrated resorts” that are “more cutting-edge and entertainment-centric.” However, the gambling provides the sales base to spread fixed costs of the properties, lobbying, and building structures that are needed to build a casino resort. An interesting idea to look at is whether or not casinos should be monopolies, or at least collude in order to function. Similar to power plants with high start up costs, it could be necessary to control how many suppliers are available. By running in a monopoly style market the monopoly would supply less than if it was a free market thus reducing the amount of people who gamble.
3 Responses to Gambling
Reilly’s blog regarding Mr. Ho’s declining market share within the casino industry highlights the Chinese government’s role in distributing gambling licenses. The creation of six licenses enabled other competitors to gain entry into the market. Maintaining six firms rather than one seems to be a rational modification to the marketplace in order to increase the competitive nature of the prices and innovation in the resort/casino space.
Yet, what is more interesting is Mr. Ho’s plans to expand internationally. Even in the contemporary environment, one screens for investment opportunities that have exposure to firms expanding their product segments in the Chinese growth market. In this case, the opposite is true. China has been developing within a global context since the late 1970s and now Chinese firms are increasingly beginning to expand from China into other countries. This development, along with the increasing amount of reverse brain drain occurring, sends a signal that China is capitalizing on its rapid growth, becoming a more developed country. The standard of living is rising and firms are prospering enough to expand into other growth markets—despite the still limited Chinese capital markets. This phenomenon emphasizes the clear development of the economy. The economy has come a long way since the implementation of the “household responsibility system” in the early 1980s. During which, individuals and firms became concerned with minimizing costs and maximizing revenues, a fundamental concern illuminated by Mr. Ho three decades later.
Increasing licenses is a way to increase the total size of the industry through a positive externality: introduce a greater array of casinos and shows and you can potentially turn Macao from a place for gambling addicts to a resort destination that, if not family oriented, at least can appeal to a wider array of people.
Licensing of course is a way for the government to share in “rents” from a good for which demand is perceived as inelastic, and hence where the tax introduces very little distortion [= does not shift quantity much].
I find this post very interesting based on the conflicting interests between the country of Japan (due to its potential for profit from a gambling market) and “the junior Ho.” This is a very cut-and-dry example of a situation where conflicting interests inhibit economic profit, which happens on a daily basis in the creation of policy. A more dramatic and nuanced example can be witnessed in our country’s current governmental shutdown.
Gambling could open a whole new segment of the market, but it could be at the detriment of other segments. Balancing these interests are the difficult part.