Own- And Cross-Price Elasticities for Games Within a State Lottery Portfolio

Abstract

Lotto demand modeling typically focuses on a single game and evaluates whether estimated "effective price" (expected loss from buying one ticket) elasticity is consistent with net revenue maximization. However, a portfolio of several different lottery games is now usually offered to players and judging the effectiveness of agencies in generating revenue requires estimation of both cross-price and own-price elasticities. Here we employ data from Spain to derive elasticities. Results imply that games are under-priced if net revenue maximization is the goal. But the cross-price estimates suggest that the operator is successful in limiting the extent to which a large jackpot on one game cannibalizes same-week sales of other games. The paper also analyzes the impacts from two increases in the level of entry fees introduced during the data period. These appear to have affected net revenue favorably. (JEL D12, G11, H27, H30, L83)

Demand for Lottery Gambling: Evaluating Price Sensitivity Within a Portfolio of Lottery Games

“…This result is particularly interesting in comparison to fndings from previous studies. The models developed by Forrest, Gulley, and Simmons (2004) and Perez and Forrest (2011) report small and statistically insignifcant cross-price estimates, suggesting that competing games tend to be largely independent of one another, while the fndings of Grote and Matheson (2006) suggest a slight complementary relationship between closely competing games.…”

State Lotteries as a Multiproduct Monopoly

“…We then turn to the estimation of the following typical lottery demand system where we additionally include cross effective prices in the regressors (Lin and Lai, ; Perez and Forrest, ): where bets B are in logarithm. Lagged bets B (− 1 ) are included in order to account for habit formation (Perez and Forrest, ) and squared trend T 2 accounts for possible nonlinearities. W is a dummy taking the value 1 when the lottery draws take place during the weekend (weekday effect).…”

“…Recently, game interdependence has been examined in a number of papers not only among lotteries but also among other games as well (Forrest et al ; Perez and Forrest, ; Lin and Lai, ; Forrest et al ). Perez and Forrest (), in particular, stressed the fact that whenever the operator sells multiple games with interdependent demands, the unit elasticity rule will not hold. In this paper, we provide a technical rule on how a monopolist should price lotteries when players consider them as either substitutes or complements, and we show that it is not only demand interrelation that should be taken into account but relative size of games as well.…”

Modelling regional lottery sales: Methodological issues and a case study from Spain

“…Among the national games (i.e., apart from the transnational EuroMillones ), El Gordo de la Primitiva typically offers the highest jackpot. However, Perez and Forrest () found little cross‐elasticity between the various games, so that a high jackpot in one did not cannibalize sales of the others in the same or following week.…”