Sat | Mar 28, 2020

Advertorial | More options, more winnings: gaming industry does not qualify for natural monopoly status

Published:Monday | March 23, 2020 | 12:09 PM

A natural monopoly is necessary in an industry with heavy fixed costs and a high break-even point. This means that a firm operating in such an industry needs a guaranteed revenue stream and rate of return in order to cover its fixed and variable costs and to generate a rate of return for its shareholders.

Fixed costs or sunk costs represent the initial upfront infrastructural costs of these industries, while the variable costs are those involved with the day to day running of the business such as raw materials and labour, which can be reduced without having a deleterious impact on its viability.

This is why firms operating in key non-consumer discretionary industries such as, power and water distribution, rail transportation and mining, which involve heavy upfront fixed costs are the ones that are given natural monopoly status.

Technology driven

The gaming industry is a high technology driven and consumer discretionary one and as a result, it does not qualify for natural monopoly status.

The profit maximising output of the monopolist is where it’s marginal costs or the costs of producing an extra unit of output is equal to the marginal revenue generated from that output but where the price to the consumer is always higher. It therefore leads to an inefficient allocation of the country’s resources, higher prices to the consumer and lower levels of output as well as unemployment. This is why the most productive economies are the ones that are more competitive.

It is therefore against this background and the growing demand for gaming options in Jamaica, particularly among the masses of the people 60 per cent of whom earn the minimum wage of just over $7,000 per week, that more competition is needed in the gaming industry.  

Current landscape

Research indicates that gaming revenues of the current dominant player grew by over $10 billion or  0.5 per cent  of Gross Domestic Product (GDP) last year when the rate of economic growth decelerated to 0.9 per cent from 1.6 per cent during the previous year. The data further indicates that there was a positive correlation between the rate of deceleration in economic growth and the acceleration in rate of growth in gaming expenditure last year.

This, because as the economy falters, more people turn to gaming in order to improve their fortunes. Additionally, the lower the costs of the gaming options available to the consumers and the higher the pay-outs relative to the costs of these options, more people will spend a portion of their limited income on gaming.

This is why the monopolist in the industry is reporting a 15 per cent increase in the number of tickets sold last year to 97 million in an adult population of 1.7 million, when compared to the year 2018 when the economy grew by almost 2 per cent. 

This is why the pay-out of $50.77 billion made by the monopolist last year represented  69.39 per cent or only 69 cents out of every one dollar of the $73.16 billion in revenues it raked-in during the year.

The data further indicates that even after paying out this amount and $7.8 billion to the Government of Jamaica the monopolist still had almost $10 billion or 0.4 per cent of GDP to run its operations.

This indicates why there is room for more competition in the industry in order to force the current dominant player to become more innovative so that it can reduce the costs of operations; increase the number of gaming options available to the growing gaming market; reduce the costs of these options and increase the pay-outs to the consumers and government.

Monopoly flawed

The argument that more competition would reduce the revenue flows to the government is therefore flawed because the almost $10 billion that the company retained after the pay-outs to the public and government indicate that if there was more competition the government would be able to get more revenues from the current player, as well as from the new players in the industry.

The revenues from the lotteries and pins segment of the current dominant player’s business jumped by 17.46 per cent to $3.52 billion last year, supporting this view.

The argument that more competition in the gaming industry would have a deleterious impact on the country’s pension funds is also totally flawed because pension fund managers are required to hold a diversified portfolio of assets-ranging from government securities and sound blue chip companies such as, those in banking, manufacturing, infrastructure. There are now a greater range of investment options available to pension fund managers, given the international recognition of Jamaica’s stock exchange.

Pension fund managers would therefore be extremely imprudent if they exposed themselves,  their funds and their clients to the concentration risks that would cause more competition in the gaming industry to affect the viability of their funds.

A more competitive gaming industry and economy represent a win-win situation for all concerned because they lead to a more efficient allocation of the country’s scarce resources, higher levels of output and employment and as a consequence more social security options.