Missouri Casino Revenue Sensitivity to Competing Casinos

1. Missouri Casino Revenue Sensitivity to Competing Casinos Doug Walker and Todd Nesbit College of Charleston 51st Southern Regional Science Association MeetingCharlotte, North CarolinaMarch 23, 2012

2. Motivation • Commercial casinos have either been recently legalized or are under consideration in a variety of states • NY, NH, KS, OH, FL, MA, KY • Renewed interest during recession • Recently states have been following a “regional” model • KS, OH, MA • More established markets are clustered: NV, NJ, MS • As casinos spread, “saturation” becomes a potential issue • Few (if any) studies have examined intra-industry competition for casinos Walker and Nesbit, "Missouri casinos..."

3. Choice of Market • Tribal casinos present a problem in analyzing revenues, • Tribes are sovereign nations and do not publicize revenues • Racinos present a problem because different types of gambling are offered • Competition between racing and machine games may be difficult to control for • The ideal market would not have tribal casinos or racinos in the area • (unless great data were available…which they’re not) • Missouri and Illinois both look good • Well-established markets, no tribal casinos, no racinos Walker and Nesbit, "Missouri casinos..."

4. Missouri • 6th state to legalize casinos • 12 riverboat casinos currently (13 legal max.) • Changing regulations • “Boats in moats” within 1,000 feet of Missouri/Mississippi rivers • 1998 voters eliminated the “cruise to nowhere” requirement • 2008 voters eliminated the $500 loss limit • 2008 Illinois smoking ban affected MO casinos • See Garrett and Pakko (2010) • Basic information for casinos in 2011 on the next page… Walker and Nesbit, "Missouri casinos..."

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6. Missouri casino markets • Kansas City • 4 casinos, plus 1 in St. Joseph (N of KC) • New casino at Kansas Speedway opened in Feb. 2012 • Too new to be included in our analysis • Several small tribal casinos in KS within 100 miles • St. Louis • 4 casinos • 2 competing casinos in Illinois (Alton; E. St. Louis) • Boonville; LaGrange; Caruthersville • Map of Missouri and competing casinos on next page… Walker and Nesbit, "Missouri casinos..."

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8. Literature review • No study has examined intra-industry competition within a state • Gallagher studies Illinois, in another session here • Several studies have examined inter-industry relationships for gaming industries • Walker & Jackson (PFR 2008), look at casinos, lotteries, grey-hound and horse racing • Included a variable for adjacent-state gambling availability • Cite most relevant studies as of 2008: • Davis, Filer, & Moak (1992); Thalheimer, & Ali (1995); Ray (2001), Siegel & Anders (2001), Elliott & Navin (2002), Fink & Rork (2003), Kearney (2005) • Cross-border shopping literature: Knight & Schiff Walker and Nesbit, "Missouri casinos..."

9. Literature review, cont. • Casino adoption literature • Wenz (2008, Cityscape) studies 1990-2000 in a county-level analysis • Considers bordering counties and tribal vs commercial decisions • Richard (2010, JGS) looks at the decision to adopt at an international level • Calcagno, Walker, and Jackson (2010, PC) focus on fiscal stress and desire by states to maximize tax revenues • Missouri Gaming Commission invited study • Focused on competition a 13th casino would create • Assumed in best case there was no negative impact on existing casino revenues • No direct economic studies of intra-industry competition Walker and Nesbit, "Missouri casinos..."

10. Data • Sample period is 1997.1 through 2010.2 • Missouri casino data: • Quarterly adjusted gross revenues (AGR; real) • Dependent variable • Missouri casino size • Annual number of table games • Annual number of machine games • Annual square footage of casino floor space • Competing casino size • Above size variables for any casinos within 100 miles of a MO casino • Includes casinos in Illinois, Iowa, and Kansas • Distances between casinos Walker and Nesbit, "Missouri casinos..."

11. Data, cont. • Demographic (demand) data • Collected for MSA within which the casino is located, except… • Boonville, adjacent to Columbia MSA • Caruthersville, near Dyersburg, TN micropolitan statistical area • LaGrange, near Quincy, IL micropolitan statistical area • Annual population estimate • Annual unemployment rate • Annual per capita personal income (real) • Data sources: States’ gaming regulatory agencies; Census, BLS, BEA; Casinocity.com and Arc GIS 9.3 Walker and Nesbit, "Missouri casinos..."

12. Model • Regional competition model: “Distance Scaled Competition” (DSC) • For each MO casino iwe collect… • Size, table, machine data for all other j casinos within 100 miles • Distancei,jis “as the crow flies” • Scale each measure by , and sum the scaled measures: for all i = 1…n (As size of a competing casino increases, or distance decreases, DSC increases: an increase in regional competition) Walker and Nesbit, "Missouri casinos..."

13. Model, cont. • We use the log of each variable, except Urate, for easier interpretation as elasticities • Since Sq Ft is highly correlated with Tables and Machines, we estimate two separate specifications • (1) casino size is Sq Ft, and DSC is Distance Scaled Sq Ft • (2) casino size is Tables and Machines, so DSC is Distance Scaled Tables and Distance scaled Machines (two separate variables) • Pooled model without annual or quarter fixed effects • Period fixed effects were estimated but didn’t add explanatory power and didn’t change qualitative results Walker and Nesbit, "Missouri casinos..."

14. Preliminary Results • Columns 1&2: • 10% incr in casino size 7.5% incr in own revenue • 10% incr in DS_SqFt 1.6% decr in casino revenue • Columns 3&4 • 10% incr in machine count 9.7% incr in own revenue • 10% incr in table count 0.9% incr in own revenue • 10% incr in DS_Mach 2% incr in casino rev • 10% incr in DS_Tables 3% decr in casino rev Walker and Nesbit, "Missouri casinos..."

15. Results, cont. • Next we posit a Spatial Durbin Model (SDM) • WX is the weighted average of the explanatory variables of neighboring casinos • e.g., weighted average of PCPI of neighboring casinos • Wy is the spatial lag of the dependent variable • i.e., the weighted average of neighboring MO casino revenues • Interpretation of Wy requires direct and indirect effects • Direct effects are interpreted as “own effects,” including feedback • Indirect effects are interpreted as combined spillover effects on all other casinos. • Total effects are the sum of the above two. Walker and Nesbit, "Missouri casinos..."

16. Results, cont. • We are particularly interested in the direct results because our goal is to measure the impact of indep. variables on a given Missouri casino’s revenues • Table 3b (in the paper) presents the direct results Walker and Nesbit, "Missouri casinos..."

17. Results, cont. • Columns 1&2: • 10% incr in casino sqft 4.8% incr in own revenue • 10% incrDS_SqFt 1.6% decr in casino revenue • Columns 3&4: • 10% incr in machine count 5.4% incr in own revenue • 10% incr in table count 2.3% incr in own revenue • 10% incrDS_Machines 1.8% decr in casino rev • 10% incrDS_Tables 0.6% incr in casino rev (insignificant) Walker and Nesbit, "Missouri casinos..."

18. Other Issues & Conclusion • Interpretation of tables (5-15 gaming positions per table) vs machines (1 gaming position per machine) • Policy change variables to include in subsequent analysis… • 1998 voters relax sailing requirement, allowing “boats in moats” within 1000 ft of river main channel • Jan 2008 smoking ban implemented in IL significantly decreased IL casino revenues (Garrett & Pakko 2010) • Nov 2008 repeal of $500 loss limit at MO casinos • Robustness checks • Use visitor count as dependent variable • Include Tunica casino market, just outside 100 mile distance from Caruthersville, MO casino • Model could be adapted to other states/markets • Contact info: Doug Walker, College of Charleston WalkerD@cofc.edu walkerd.people.cofc.edu Walker and Nesbit, "Missouri casinos..."