The Great Tightening

The 2007-2009 “Great Recession” had a profound influence on almost every market in the US and globally and to greater or lesser degrees, most are still affected.  Among U.S. states Nevada, by far, fared the worst, and it can’t really be denied that the gaming industry is the largest culprit.  It seems intuitive that when a potential Player’s income drops, that Player will choose or be forced to gamble less.  But are there peculiarities to the Casino Industry’s infrastructure and decision making process that could have exacerbated the scenario?  I suspect yes, and will argue on more or less Keynesian lines how this could have happened.

To begin, we have to consider the text-book story.  When Players get poorer, in order to induce them to keep playing, Casinos should drop their prices.  Right here we run into the first problem, how do you lower the price to the Player of a slot machine?  Once it’s on the floor the minimum bet is fixed as is the all features loaded bet.

It would seem that land based slot machines have “sticky” prices.  But this is not the end of the story.  The slot floor operator has some levers he can pull.  When games are sold to the Casino, they are sold with multiple different Returns to Player.  In theory it shouldn't be too difficult for the operator to choose how much Return he expects on the given machine.  Now in normal times, especially on the Las Vegas Strip, the Casino would “tighten” its games to squeeze more profit out of its machine.  This is a valid strategy if Casinos expect that this is within the Players’ budgets, or if they believe that they can consistently trick Players into playing tighter games.

In fact it is a mathematical law that in the long run an 85% RTP game will have a higher return to the Casino than a 90% RTP game.  But these returns are marginal returns, i.e. based on how much the Player bets, and the Player is sensitive to both returns and Wealth.  We consider a Player's Wealth to be money in her possession and money she expects to make from playing games.  Regardless of whether the Player has an accurate understanding of the fact that playing slots makes her less wealthy, she is sophisticated enough to realize she is on average getting poorer faster than she was when playing games before the recession.

So what happened, and this is well documented, is that even Casinos off the strip tightened up, in order to squeeze out more returns on their assets.  But this decision made their Players poorer, and on the margin Players, already facing their own financial constraints, chose to stop playing.  We can think of this as a lesson in What Goes Around Comes Around.  If Casinos had loosened their slot machines, would that have helped?  The model seems to suggest this is a strong possibility.

As a last consideration that I will elaborate on in the future, could this tightening have had a serious influence on the style of Players that remained?  The answer is probably yes, and this led to the same kind of push and pull of information that we see between the Casino and Manufacturer that can lead to market failures.