Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 14

Who Makes Money at Casinos?
Casino gambling is a big business in many countries. In the United States, casinos take in more than $60 billion each year in gross revenues. In some markets, casinos operate quite competitively. There are so many casinos in Las Vegas, for example, that it is unlikely that any one of them has much power to set prices monopolistically. However, many other locales have adopted entry restrictions on the numbers and sizes of casinos that are permitted. These restrictions provide the possibility for owners who can build casinos to capture substantial monopoly rents. Two illustrations are provided by riverboat casinos and by so-called Indian gaming.
Riverboat Gambling
A number of states along the Mississippi River (Illinois, Iowa, Louisiana, and Mississippi) permit casino gambling only on riverboats. The number of riverboats is strictly regulated, as are many features of their operations. For example, some states have mandatory "cruising" requirements. Under such requirements, the riverboats must actually leave port and cruise along the river. Patrons must participate in the complete cruise, and once the cruise ends they must leave the boat. This might be contrasted to land-based casinos, where patrons can come and go as they like. The purported reason for this cruise requirement (as for many other seemingly odd regulations) is to limit compulsive gambling, but there is little evidence that the regulations have this effect.
One clear impact of the way that riverboat gambling is regulated is monopoly rents for a number of different parties. States are a prime beneficiary-they usually tax net profits from riverboats at more than 30 percent-so obviously they have an incentive to adopt regulations that prevent the outbreak of competition. Some regulations themselves also create monopoly rents. For example, compulsory cruising rules benefit a variety of firms and workers engaged in river transportation who would not earn anything from stationary riverboats. Finally, the owners of the riverboats take in monopoly rents. Riverboat licenses are highly sought after and have sometimes been the fodder for major political scandals when bribes were involved in obtaining them.
Indian Gaming
The Indian Gaming Regulatory Act of 1988 clarified the relationship between states and the Native American tribes living within their borders, making it possible for these tribes to offer casino gambling under certain circumstances. Since the passage of the act, more than 120 tribes have adopted some form of legalized gambling. Revenue from this gambling amounts to nearly $30 billion, approaching half the revenue from all casinos in the United States. Indian gambling establishments range from slot machines in gas stations or card tables in trailers to the luxurious Foxwoods Casino in Connecticut, the largest casino in the nation. Overall, revenues from legalized gambling have become an important source of income for many Indian tribes.
The distributional consequences of Indian gaming are generally beneficial. The tribes offering gambling include some of the poorest people in the United States. A number of studies have documented significant declines in welfare rolls with the introduction of gaming.2 Still, the income from gambling can be quite unequally distributed, especially in the cases of smaller tribes (interestingly, the largest U.S. tribe, the Navajos in Arizona, does not operate casinos). The very few actual Indian owners of the Foxwoods Casino make many millions of dollars each annually. Assorted lawyers, consultants, and local officials also probably share significantly in the booty.
Much of the gambling in the United States is illegal. How does the presence of illegal gambling options affect the monopoly power of legalized gambling operations to set prices (that is, to set payouts to winners)? Who benefits from operations to stamp out illegal gambling?