Casinos are not the only form of gambling that governments tax. Consequently, we must consider the ways in which taxation of casinos may affect other forms of gambling and the revenue derived from them. Lisa Farrell and David Forrest (2008) draw an important distinction in this regard. Their review of the literature on the relationship between alternative forms of gambling points out that the concepts of substitutes and complements are often misapplied.
To be correct, the precise question is whether the cross-price elasticities for alternative forms of gambling are negative or positive. Authors in the gambling literature tend to be more interested in the question of whether a new form of gambling reduces sales from existing forms of gambling—a distinctly different, although important, issue.
Farrell and Forrest (2008) examined whether the introduction of casinos in Australia caused a change in lottery sales, displacing those sales. Using state-level panel data to analyze intra-state differences in the portfolio of games available, the authors report mixed results. The introduction of new super casinos appears to have reinforced lottery sales, while the addition of more slot machines in the network of local gaming venues appears to have diverted sales away from lottery games.
The evidence provided in Paton, Siegel, and Vaughan Williams 2004 indicates that the demand for bookmaker gambling in the United Kingdom is highly sensitive to the tax rate principally because the economics of casino taxation 25 that form of gambling is a strong substitute for lottery and other forms of gambling. Forrest, Gulley, and Simmons (2010) found evidence from Britain that bettors substitute away from horse race, soccer, and numbers betting as the price of lottery tickets is unusually low. 2.6 Monopoly Regulatory and Pricing Rules
There are several aspects of the monopoly position often granted to casinos by governments that deserve more attention in the literature. For example, in cases where the government applies both an admissions tax and a wagering tax, as is common in the United States, the question is why both taxes are applied. This combination may entail an optimal two-part tariff, as is often implemented in rate-of-return regulatory contexts.
Or it may reflect risk sharing on the part of the state government and the casino operator, with the state receiving a certain return for each gambler and the casino operator receiving a return based on performance. Pursuing a monopoly regulatory point of view, we could consider how the government may regulate a monopoly casino that has been granted an exclusive franchise to operate in a given geographic area.
The government could set the takeout rate to extract the monopoly rent earned by the monopoly casino. The casino would maximize its AGR net of its cost of operation: AGR −C(H), where C(H) is the casino’s total cost of operation at the handle amount H. We can assume a concave cost function, with C (H) > 0,C(H) < 0. The usual monopoly pricing solution yields the optimal takeout rate wm = C (Hm) sd (1+sd ) , where the marginal cost at the monopolist’s optimal handle C (Hm) is multiplied by the ratio of the elasticity of demand divided by one plus that elasticity. Then the government could allow the casino to retain a share of the handle equal to C(Hm) Hm and take the remaining share, w − C(Hm) Hm .