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Applied Economics, 2008, 40, 773791

Government restrictions and

the demand for casino and

parimutuel wagering

Richard Thalheimer

Thalheimer Research Associates, Lexington, KY 40507, USA

E-mail: [email protected]

Growth in casino wagering in the United States from the mid-1980s

forward has been extraordinary. Over the same period, however,

parimutuel wagering has declined. Concern for this decline has prompteda number of states to allow parimutuel racetracks to offer casino-type

gaming devices at their facilities. Such operations are commonly referred to

as racinos. If the gaming devices at a racino are under the auspices of a

state lottery, they are referred to as video lottery terminals (VLTs).

Separate parimutuel and VLT wagering demand models were estimated for

a racino facility. A number of restrictions were imposed on the VLTs at

the beginning of the study period including: number of VLTs, type of

game and machine, maximum bet per play and VLT location. The effect

of these restrictions on VLT and parimutuel handles was a major focus of

this article. Also of importance was an examination of the relationship

between the VLT and parimutuel products. Relaxation of government

restrictions on the VLTs was found to have resulted in a large increase in

VLT wagering. On the other hand, parimutuel wagering was found todecrease with the relaxation of restrictions on the VLTs. The presence

and growth of the VLT product was found to decrease parimutuel handle.

The presence and growth of the parimutuel product was found to increase

VLT handle.

I. Introduction

The casino gaming and parimutuel wagering

industries have exhibited markedly different growth

rates over the past several decades. The growth

of casino gaming in the United States from the

mid-1980s forward has been extraordinary.

To illustrate, consider that over the two-decade

period, 1982 to 2002, casino-and-related wagering1

increased 636%. Over that same period,

parimutuel wagering increased only 25%. Real

growth in casino-and-related wagering was 301%

while parimutuel wagering declined by 32%

(Christiansen, 1989; Christiansen Capital Advisors,LLC, 2004).

The increase in casino wagering has occurred

largely due to the introduction of new gaming

venues and locations augmenting the previously

existing land-based casino gaming venues of Nevada

and Atlantic City, New Jersey. The new gaming

1 Includes land-based casino gaming, riverboat casino gaming, Indian casino gaming, legal bookmaking, card rooms andcharitable gaming.

Applied Economics ISSN 00036846 print/ISSN 14664283 online 2008 Taylor & Francis 773

http://www.tandf.co.uk/journals

DOI: 10.1080/00036840600749672


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venues include riverboats, land-based casinos, Indian

casinos, and slot machines or card rooms at

parimutuel racetracks. Reasons for the decline in

parimutuel horse race wagering are well-known and

include increased competition from casino gaming

(Thalheimer and Ali, 1995a; Ali and Thalheimer,

2002) and state lotteries (Simmons and Sharp, 1987;

Vasche, 1990; Thalheimer and Ali, 1992, 1995b,1995c; Ali and Thalheimer, 1997). Not only do

growth rates between casino gaming and parimutuel

wagering vary greatly, but there are marked differ-

ences in the size of each of these gaming industry

sectors. For example, in 2002 casino-and-related

handle was $812.2 billion and parimutuel handle

was $17.9 billion (Christiansen Capital Advisors,

LLC, 2004).

Concern for the decline in handle and revenues for

the parimutuel racing industry has prompted a

number of states to allow parimutuel racetracks to

install casino-type gaming devices at their facilities.

Parimutuel racetracks that are permitted by state

statute to offer such gaming devices are commonly

referred to as racinos. In some states these gaming

devices are part of the state lottery and are placed

under the lotterys regulatory authority. In those

instances, the gaming devices are referred to as video

lottery terminals (VLTs). In other states where

electronic gaming devices are permitted at parimutuel

wagering facilities, the privately owned devices are

placed under the regulatory authority of a state

racing or gaming commission and are referred to as

electronic gaming devices (EGDs) or slot machines.

In either case VLTs or EGDs are equivalentcasino-type gaming devices, differing only in regula-

tory accountability but not in substance. In almost all

instances where racino gaming is permitted in a state,

a percent of the gaming revenue is statutorily

allocated to purses for owners of horses (greyhounds)

racing at those racetracks in an attempt to slow down

or reverse the decline in the racing industry due

to competition from other gaming venues.

The first racino in the United States was

Mountaineer Park, a small thoroughbred racetrack

in northern West Virginia. On 9 June 1990 a limited

number of video gaming devices was installed at

Mountaineer Park racetrack under provisions of a

nonstatutory pilot project involving the West Virginia

Lottery and the racetrack. Under terms of the

agreement, Mountaineer Park, Inc. acted as agent

for the Lottery. Following this initial experiment,

full-scale, racino gaming authorized by state statute

was permitted in the states of Louisiana (2002),2

Rhode Island (1992), West Virginia (1994),3Delaware (1995), Iowa (1995), New Mexico (1998)

and New York (2002).4 Gaming devices at racetracks

in West Virginia, Rhode Island, Delaware and

New York are under the auspices of the state lottery

while racinos in the remaining states are regulated by

state gaming commissions.5

To illustrate the importance of VLT gaming to

total state lottery revenue consider that in fiscal year

2002 total West Virginia lottery revenues were $728.4

million. Racetrack video lottery revenues generated

by all four West Virginia racinos accounted for

$596.0 million or 81.8% of that total (West Virginia

Lottery, 2003).

In this study the demand for VLT and on-track

parimutuel wagering at a racino location,

Mountaineer Park Racetrack and Resort

(Mountaineer Park), is determined. In March 1994,

The West Virginia Video Lottery Act was passed

giving statutory authority to the West Virginia

Lottery to conduct VLT gaming at all four

(two thoroughbred and two greyhound) of the West

Virginia parimutuel racetracks subject to local

referendum. Following passage of the required local

referendum approving the use of VLTs at parimutuel

racetracks, Mountaineer Park on 2 September 1994ended its pilot project program which had been

judged to be a success. In this study, the estimation

period is from 1994 to 2002, a period which included

both pre-pilot project and post-pilot project VLT

gaming.

Under provisions of the West Virginia Lottery Act,

a number of restrictions were imposed on the VLTs.

These included the number of VLTs, the type of

game and machine, the maximum bet per play and

VLT location. The effect of these government

restrictions on VLT and parimutuel handles is a

major focus of this article. Also of importance is an

2 Limited stakes poker machine gaming devices were permitted at racetracks and other locations such as truck stops,restaurants and lounges in 1992. Legislation resulting in casino style slot machines, restricted to racetracks, resulted infull-scale racinos beginning with Delta Downs racetrack in 2002.3 Video lottery terminal gaming was offered as permitted by state statute in March 1994, and after local referendum beginningin September 1994. At that time, three of the four West Virginia parimutuel racetracks, Mountaineer Park, Wheeling Downsand Tri-State, became racinos. Charles Town installed VLTs in September 1997 after local referendum.4 Although, New York passed enabling racino legislation in 2002, racinos did not come on-line in that state until 2004.5 In 2004, racinos were authorized but not yet implemented in the states of Maine, Oklahoma and Pennsylvania. The gamingdevices were not under the state lottery in any of these states.

774 R. Thalheimer


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examination of the relationship between the VLT and

parimutuel products.

The plan of this study is as follows. Section II

reviews the existing empirical literature on the

demand for racino gaming. Section III develops

two econometric models of the demand for

racino gaming, one for VLT wagering and one

for parimutuel wagering. Section IV reports theestimated model and presents empirical results on

the factors affecting the demand for racino wagering.

In addition to reporting results for traditional

demand variables, the effects of government

restrictions over the estimation period are reported.

Section V summarizes the findings and draws further

conclusions.

II. Previous Studies

Prior econometric models of the determinants of thedemand for parimutuel horse race wagering include

those of Gruen (1976), Coate and Ross (1974), Suits

(1979), Morgan and Vasche (1979, 1982), Simmons

and Sharp (1987), DeGenarro (1989), Church and

Bohara (1992), Thalheimer and Ali (1992, 1995a,

1995b, 1995c) and Ali and Thalheimer (1997, 2002).

Unlike studies of the demand for parimutuel

wagering, there have been few econometric studies

of the demand for casino gaming. Cargill and

Eadington (1978) developed a quarterly forecasting

model of casino win (revenue). Nichols (1998b) used

a BoxJenkins time series intervention model to

investigate the effect of deregulation of gaming

floor space on slot machine and total win at the

Atlantic City, New Jersey casinos. The relaxing of

floor space restrictions was found to have a

significant positive effect on win. Nichols (1998a)

developed regression models for win, win per

admission and admissions for riverboats in Iowa.

Deregulation was found to have a significant positive

effect on casino win at Iowa riverboats. Hunsaker

(2001) developed separate models of casino win in

Atlantic City, New Jersey and the Las Vegas, Nevada

Strip and their relationship to riverboat win in other

states. An excellent review of various economic issuesaffecting the casino gaming industry can be found in

Eadington (1999). None of these models focused on

the economic behaviour of customers with regard to

wagering demand, rather they were reduced form

equations designed to either forecast or assess the

impacts of various factors such as government

regulations on gaming revenue (win).

While previous studies examined casino win or

revenue, the only study of the demand for casino

wagering was that of Thalheimer and Ali (2003).

The subjects of the analysis were all riverboats and

racinos in the Midwestern states of Illinois, Iowa and

Missouri. Specifically, an econometric model was

developed relating the demand for slot machine

wagering to its determinants. One important finding

of that study was that government restrictions on

bet size/total wager, and restrictions on customeraccess resulted in significant reductions in slot

machine handle.

Only one previous study examined the demands for

parimutuel and VLT (slot machine) wagering at a

racino location (Thalheimer, 1998). In that study,

separate econometric demand models were specified

for VLT gaming and on-track parimutuel horse race

wagering. The subject of the analysis was

Mountaineer Park. The period of analysis was daily

from 19891991 during which a limited number

of VLTs were placed at the racetrack as a pilot

project under the auspices of the West Virginia State

Lottery. It was found that the introduction of VLTgaming at a racetrack caused a significant decline

in on-track parimutuel wagering. However, VLT

revenue was found to be sufficient to offset the

decline in on-track parimutuel revenue.

III. Data Description and Model Specification

The Mountaineer Park Racetrack and Resort racino

in West Virginia is located near the Ohio and

Pennsylvania borders. The market area for

Mountaineer Park is defined as including those

potential customers who reside in counties lying

within a 100-mile radius of the racino. This market

area definition was used in an earlier study of the

demand for casino gaming (Thalheimer and Ali,

2003). Market area population averaged 8.47 million

over the first 12 months of the study period, falling

slightly to 8.39 million in 2002. In 2002, the market

area population was distributed as follows: 4.72

million in Ohio, 3.23 million in Pennsylvania and

0.44 million in West Virginia.

During the study period Mountaineer Park

included a hotel, Mountaineer Lodge, with 101rooms and a restaurant, located at a short distance

from the racetrack. In addition to Mountaineer

Lodge, a new hotel was opened near the end of the

study period in 2002. Video lottery gaming and

wagering on the simulcasts of races from off-site

racetracks were available both at the racetrack and

lodge.

In the previous study for which Mountaineer Park

was also the subject of analysis (Thalheimer, 1998)

Demand for casino and parimutuel wagering 775


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the demand for racino gaming was estimated using

daily data from 1989 to 1990. The period of analysis

was immediately prior to and after the nonstatutory

pilot project when a limited number of VLTs were

installed at the racetrack under the auspices of the

state lottery. In this study the period of analysis

is July 1994 through December 2002. Data are

weekly with 443 observations over the study period.The data cover a period that includes the end of the

limited-VLT pilot project period and subsequently

the period where the statutory provisions of the West

Virginia Lottery Act of 1994 replaced the temporary

provisions of the pilot project period. In what

follows, two econometric models are developed,

one each for the demand for VLT and on-track

parimutuel wagering both occurring at a single racino

location.

Dependent variable

Demand is measured as handle per unit of marketarea population for VLT wagering (PCHAND_VLT)

and for on-track parimutuel wagering

(PCHAND_PARI). Annualized total VLT handle

increased from $131 million to $2.6 billion from the

first to the last 12 months of the study period. On a

weekly basis, per capita VLT handle increased from

$0.30 to $5.92. Real per capita VLT handle

(RPCHAND_VLT) increased 1.580%.

Annualized total on-track parimutuel handle

increased from $38.2 million to $39.4 million from

the first to the last 12 months of the study period.

On a weekly basis, per capita parimutuel handleincreased from $0.087 to $0.090 while real per capita

parimutuel handle (RPCHAND_PARI) declined by

13%. The relative importance of parimutuel handle

to total VLT plus parimutuel handle decreased over

the study period. On-track parimutuel handle fell

from 22.7% to 1.5% of total handle.

The functional form chosen for the analysis relates

the logarithm of real per capita handle to its

determinants. This specification was chosen to

ensure that handle will be positive. The two

dependent variables transformed into their

logarithmic equivalents are LRPCHAND_VLT

and LRPCHAND_PARI.

Demand determinants

The major determinants of the demand for a product

are price and product characteristics of the product,

price and product characteristics of competing

products, market area income and other factors

influencing the market environment such as

government restrictions. Following is a discussion

of the demand determinants for both parimutuel and

VLT wagering.

VLT and parimutuel demand determinants general market environment

General market environment factors affecting thedemands for both VLT and parimutuel wagering

include,

. trend

. seasonality

. holiday

. market area per capita income

. extreme weather conditions

. competition

A stochastic trend term was introduced to

capture effects such as continuing capital improve-

ments not captured by the other included variables.The trend variables for VLT and parimutuel wager-

ing demands are the lagged dependent variables

LRPCHAND_VLT(-1) and LRPCHAND_PARI

(-1), respectively. Seasonality in the data is captured

by the binary(0, 1) month variables: JAN, FEB,

MAR, APR, MAY, JUN, JUL, AUG, SEP,

OCT, NOV, DEC. The holiday effect is captured

by the binary(0, 1) national holiday variable,

HOLIDAY. Extreme weather conditions which

were observed for the winter week of 9 January

1999 and which resulted in limited wagering

availability, are captured by the binary(0, 1) variable,

BADWEATH.The market area economic environment is captured

by per capita income, PCI. The independent variable

real per capita income is denoted by RPCI. It is

expected that both VLT and parimutuel wagering

demands will be positively related to real per capita

income and will increase at a decreasing rate. For

this reason, RPCI is transformed into its logarithmic

equivalent, LRPCI.

The major competitors for Mountaineer Park

over the study period were Wheeling Downs grey-

hound racino in West Virginia, located approxi-

mately 55 miles away and the West Virginia StateLottery. Since both Wheeling Downs and the state

lottery were in place over the entire study period their

effects on the demand for wagering at Mountaineer

could not be determined.

The effects on handle of the new hotel which was

opened in 2002, augmenting the existing Mountaineer

Lodge, could not be determined, possibly due

to the lack of a sufficient time period over which to

determine its impact.

776 R. Thalheimer


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VLT and parimutuel demanddeterminants VLT-specific

Each of the VLT-specific demand variables,

i.e. number of VLTs, type of VLT, location of

VLTs and maximum VLT bet, was subject to

government restrictions at some point over the

study period. Video lottery terminals-specificfactors affecting the demands for both VLT and

parimutuel wagering include,

. number of VLTs

. VLT type

. VLT location

. VLT maximum bet per play

. VLT wagering days

. VLT price

The number of VLTs was increased greatly over

the study period. In fiscal year 1994 at the beginning

of the study period Mountaineer Park had 165 VLTs

under the pilot program. These were replaced in

September 1994 by 400 newer generation VLTs

permitted with enactment of the West Virginia

Lottery Act of 1994. Subsequent increases in the

number of VLTs required permission from the West

Virginia Lottery Commission. Upon request by

Mountaineer Park, the number of VLTs was

increased over the study period from 400 in 1994 to

800 in 1995, to 1000 in 1997, to 1200 in 1998, to 1345

in 1999, to 1905 in 2000, to 2500 in 2001 and to 3000

by the end of 2002.

VLT demand is expected to be positively related to

the number of VLTs and to increase at a decreasingrate (Thalheimer and Ali, 2003). For this reason, the

VLTs variable (VLTS) was transformed into its

logarithmic equivalent, LVLTS. Parimutuel wagering

demand is expected to be negatively related to the

number of VLTs (Thalheimer, 1998). Parimutuel

demand was specified as a linear function of VLTS.

In this study, the relationship of the type of VLT to

VLT wagering demand is examined for the first time

in the literature. The type of VLT offered to

customers is constantly changing with new game

innovations and new technologies. The VLTs avail-

able and permitted at various times over the study

period varied by combinations of payment methodand game option. There were two payment methods

available over the period. Initially, during the pilot

project period and with passage of the West Virginia

Lottery Act, all VLTs had to pay out winnings

by issuing a ticket, paper receipt when a player

finished play. This receipt could then be cashed by the

racino cashier. Machines with this type of payment

option are referred to as ticket-out machines.6 The

second type of payment method, permitted later in

the study period, is referred to as a coin-out or coin-

drop. Coin-out machines pay winnings as coins

dropped into a container on the front of the

machine.In addition to payment method, the type of VLT

was also defined by different game options permitted

at various times over the study period. Some

machines offered multiple game options while

others offered single game options. All machines

offering multiple game options were video gaming

devices. The single game machines could offer either a

video game such as a multi-payline slot machine-type

game or a classical mechanical spinning reel

Las Vegas-style slot machine game. The naming

convention for machine type used in the remainder

of this study is: VLT_ payment type_number of

games_machine type( game options). Payment type

can be ticket-out (T) or coin-out (C). The number

of games on a machine can be one (SINGLE) or more

(MULTI). Machine payment type can be video (VID)

or mechanical spinning reel (REEL). A chronology

of the introduction of various machine types

now follows.

The pilot project period ended in September 1994

with implementation of the West Virginia Lottery

Act of 1994. The first-generation ticket-out, single

game, video, VLTs permitted over the pilot project

period are designated as VLT_T_SINGLE_VID

(pilot: card, keno or slot).The West Virginia Lottery Act initially provided

for 400 second-generation ticket-out multi-game

video machines which were installed at the racino

on 2 September 1994. These machines replaced all of

the original 165 pilot project machines. They offered

card and keno games and are designated as,

VLT_T_MULTI_VID(card, keno). While offering

both card and keno games on a single machine, the

Lottery Act prohibited them from offering a video

slot machine game option. In July 1996, a video slot

machine game option was permitted for use on the

VLTs and was available as an additional game

option on the existing ticket-out machines,VLT_T_MULTI_VID(card, keno, slot).7 By

October 1998, all of the existing and new ticket-out

VLTs had the video slot game option.

In June 1999, the statutes were again changed to

permit coin-out payment machines with various

6 In recent years, receipts from ticket-out machines can be used as input to other machines in lieu of receiving cash.7 See MTR Gaming Group, Inc., United States Security and Exchange Commission, Form 10-K, Annual Report,31 December 1996. The simulated slot machine game startup was obtained from earlier reports.



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associated new game options. There were three game

options associated with the newly permitted coin-out

machines. In November 1999, the first coin-out

machines were placed on the racino floor. These

were classic Las Vegas-style single game mechanical

spinning reel slot machines, VLT_C_SINGLE_

REEL(classic slot). These were followed in April

2000 by multi-game coin-out video machines withcard and slot game options, VLT_C_MULTI_VID

(card, slot). Finally, in August 2000, single game

multi-payline video slot machines,

VLT_C_SINGLE_VID(multi-line slot) were installed

on the racino floor. These video machines (generally

with low coin input denominations such as penny or

nickel) have symbols on more than one line and offer

many possibilities of connecting symbols both on a

single line and between lines.

The distribution of machine types in a given period

was determined as the ratio of the number of each

available machine type divided by the total of all

existing machine types. Each machine type in a given

period, thus assumed a value between 0 and 1 and the

total of machine types in a given period summed to 1.

Because the number of VLTs largely accounted for

the VLT impact on parimutuel wagering, the

distribution of machines by type was not included

in the parimutuel demand model.8

As was the case for machine types, the effect on

demand of the location of VLTs has not been

examined in previous studies. Video lottery terminals

were located at both the racetrack and lodge. The

placement of the VLTs at the lodge and racetrack is

measured by the VLT lodge-to-track ratio(VLT_LODGETOTRACK). Prior to enactment of

the West Virginia Lottery Act, there were no

restrictions on location of the VLTs. The ratio of

VLTs at the lodge relative to the racetrack was 0.4.

The Lottery Act provided for restrictions on the

location of the VLTs at the racino over the study

period. The Lottery Act specified that a 1 : 1 ratio of

machines at the lodge vs. those at the racetrack be

maintained. The statutes were amended in June 1998

to permit a 2 : 1 lodge-to-track ratio. Finally, in 2000,

the statute was amended to eliminate the relative

placement requirements of the VLTs between the

racetrack and lodge. The nonrestricted lodge-to-track

ratio was 3.4 : 1 in the last year of the study period.

The maximum bet per play on a VLT as permitted

by statute was initially set at $2 which was raised

to $5 on 21 April 2001 as a result of changes in

the statute. This government restricted maximum

bet is defined by the binary (0,1) variable,

VLT_BETLIMIT2TO5.9

The number of VLT days per week was not

included in the estimating equations, since the

VLTs were operated year-round 7 days per week,

with the exception of Christmas Day, and so their

effect on the demand for VLT and parimutuelwagering could not be determined.

The price of VLT gaming is the win percent. This is

the amount remaining after payout of winning bets

relative to total handle. The win percent which

averaged 8.5% over the study period was relatively

constant throughout the period and so its effect on

VLT or parimutuel wagering demand could not be

determined.

VLT and parimutuel demanddeterminants parimutuel-specific

VLT-specific factors affecting the demands for both

VLT and parimutuel wagering include,

. parimutuel wagering days

. number of on-track full-card simulcast programs

per parimutuel wagering day

. live race days per parimutuel wagering day

. average daily purse

. presence of stakes race

. price of parimutuel wagering.

The days per week over which parimutuel wagering

was conducted (DAYSPARI) varied from five to

seven over the study period. Wagering at a racetracklocation on a full schedule (card) of races simulcast

from other racetrack who are conducting live racing

is referred to as full-card simulcasting. Wagering on

simulcasts of live horse and dog races sent to

Mountaineer Park from other in-state and out-

of-state parimutuel racetrack locations was available

each week over the study period. It is expected that

parimutuel wagering demand is positively related to

DAYSPARI and increases at a decreasing rate. For

this reason, DAYSPARI was transformed into its

logarithmic equivalent, LDAYSPARI.

The intensity of the full-card simulcast product was

defined by the number of racetracks whose signals

were received at Mountaineer Park over a week

divided by the number of parimutuel wagering days

in the week (FULLCARD). The average number of

full-cards per parimutuel wagering day increased

8 The overall explanatory power of the included demand determinants was virtually unaffected by this action. The adjustedcoefficient of determination was 0.875 with VLT types included and 0.865 when they were excluded.9 See MTR Gaming Group, Inc., United States Security and Exchange Commission, Form 10-K, Annual Report 31December 2002. The simulated slot machine game startup was obtained from earlier reports.

778 R. Thalheimer


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from 4 per day over the first year of the study period

to 18 per day over the last year of the study period. It

is expected that parimutuel wagering demand is

positively related to FULLCARD and increases at

a decreasing rate. For this reason, FULLCARD was

transformed into its logarithmic equivalent,

LFULLCARD.

Live horse racing was conducted on all but 5 of the443 weeks in the study period, but not every day of

the wagering week. When offered, live racing was

always conducted on a day when full-card simulcast-

ing was offered. The number of live race days in a

week was equal to or less than the number of

simulcast days in a week. The availability of live

horse racing on a parimutuel wagering day

(LIVECARD) was computed as the number of live

race days in a week divided by the number of

parimutuel wagering days in that week. LIVECARD

varies between zero and one.

Live race purse per wagering day, LIVEPURSE, is

a measure of product quality to the wageringcustomer. Live race purse per race day increased

from $23 500 to $163 100 over the study period. The

independent variable real live race purse is denoted by

RLIVERPURSE. To show the importance of statu-

tory payments to purses from VLT revenues consider

that in fiscal year 1995, the first 12 months of the

study period, payments from VLT revenues were

36% of total live race purses, the remaining 64%

being funded by payments from parimutuel handle.

By 2002, the last 12 months of the study period,

payments to live race purses from VLT revenues were

79% of the total with payments to purses from

parimutuel handle accounting for the remaining 21%.

Stakes races are the highest quality of race offering

the highest purse at a racetrack. In this study, the

stakes race of greatest regional importance was the

West Virginia Derby (STAKE_WVDERBY) con-

ducted live at Mountaineer Park. Simulcasts of the

three triple crown stakes races of greatest national

interest, the Kentucky Derby (STAKE_KYDERBY),

the Preakness Stakes (STAKE_PREAKNESS) and

the Belmont Stakes (STAKE_BELMONT) were

available to Mountaineer customers each year over

the study period. In addition, the simulcast of the

Breeders Cup (STAKE_BRCUP) another stakesevent of national importance was also available to

Mountaineer customers each year over the study

period.

The price of parimutuel wagering is the takeout

rate, the statutory percent withheld from each wager

for payment to government, racetrack and horsemen

(purses, breeders awards). The takeout rate on live

racing, which averaged 23% over different bet types,

was not changed by statute over the study period and

so its effect on VLT or parimutuel wagering demand

could not be determined.

Summary of model specification VLT

The VLT demand model is specified as

LRPCHAND VLT 0 1LRPCHAND VLT 1 2JAN

3FEB 4MAR 5APR 6MAY

7JUN 8JUL 9AUG 10SEP 11OCT

12NOV 13HOLIDAY

14LRPCI 15LVLTS

16VLT T MULTIcard, keno

17VLT T MULTI VIDcard, keno, slot

18VLT C SINGLE REELclassic slot

19VLT C SINGLE VIDmulti line slot

19VLT C MULTI VIDcard, slot

21VLT LODGETOTRACK

22VLT BETLIMIT2TO5 23LDAYSPARI

24LFULLCARD 25LIVECARD

26RLIVEPURSE 27STAKE WVDERBY

28STAKE KYDERBY

29STAKE PREAKNESS

30STAKE BELMONT

31STAKE BRCUP 32BADWEATH u

1

where the variables and their functional forms are aspreviously discussed and u is the error term.

Summary of model specification parimutuel

The demand determinants for the parimutuel demand

equation are identical to those in the VLT demand

equation with the exception that the VLT machine

type variables are not included. Additionally, the

VLT variable, which is expected to be negatively

related to parimutuel handle, is specified in linear

form. The parimutuel demand model is specified as:

LRPCHAND PARI 0 1LRPCHAND PARI 1 2JAN

3FEB 4MAR 5APR 6MAY

7JUN 8JUL 9AUG 10SEP

11OCT 12NOV 13HOLIDAY

14LRPCI 15VLTS

16VLT LODGETOTRACK

17VLT BETLIMIT2TO5 18DAYSPARI



8/20

19LFULLCARD 20LIVECARD

21RLIVEPURSE 22STAKE WVDERBY

23STAKE KYDERBY

24STAKE PREAKNESS

25STAKE BELMONT 26STAKE BRCUP

27BADWEATH u 2

where the variables are as previously discussed and u

is the error term.

Data sources and summary statistics

Data definitions and sources are given in appendix

Table A1. Summary statistics are given in appendix

Table A2.

IV. Model Estimation and Analysis

The parimutuel and VLT wagering demand models

were estimated using ordinary least squares.

VLT demand model

The estimated VLT handle demand model is given in

Table 1. The estimated equation fits the data well

with an adjusted R2 of 0.991. The equation is

statistically significant. The BreuschGodfrey LM

(Lagrange multiplier) statistic indicates the absence of

serial correlation. This suggests that the equation is

likely free of specification errors such as those causedby omitted variables or incorrect functional form.

Of the 32 variables, 25 were significant at the 5%

level or lower. All of the VLT-specific variables

and the stochastic trend variable were significant.

Per capita personal income and the parimutuel

variables, live race purse and each of the stakes race

variables were not significant.

Video lottery terminal handle was positively related

to the stochastic trend. This indicates that variables

not specifically included in the equation, such as

capital improvements made over the period, had a net

positive effect on VLT handle. Video lottery terminalhandle was also found to increase at a decreasing rate

with the number of VLTs. The long-run elasticity

with respect to the number of VLTs was found to be

0.36.10

VLT handle was also found to be positively related

to each of the machine type variables. The impact of

each machine types is computed relative to the

omitted pilot period machine type variable,

VLT_T_SINGLE_VID(pilot: card, keno or slot).

To compare the relative impacts on VLT handle for

each of the machine types, their impact is computed

for a 1% share of total available machines asfollows:11

The machine type with the greatest impact on VLT

handle was the classical Las-Vegas, coin-out spinningreel slot machine. Another interesting finding was

that the permitted addition of a video slot machine

game option to the existing ticket-out, multi-game,

video card and keno machines, i.e. VLT_T_MULTI_

VIDEO(card, keno, slot) vs. VLT_T_MULTI_

VIDEO(card, keno), more than double the impact

of those machines on VLT handle.

It should be mentioned that other factors

included in the product characteristic mix for each

machine-type are characteristics that may vary

between and within machine types. Such character-

istics would include, for example, win percent12 and

minimum bet (e.g. nickel, quarter, dollar). Availableinformation did not permit measurement of the effect

of each of these factors on VLT handle independent

of the machine-types with which they were associated.

The individual impacts of the various machine

types at the Mountaineer Park racino are facility

and location-specific and may not be able to be

generalized with respect to other racino locations.

What is apparent from this aspect of the analysis is

that customers showed distinct preferences for

machines with different product characteristic

packages such as payment method, type of game,

and number of game options.VLT handle was found to be positively related to

the VLT lodge-to-track ratio. Video lottery terminal

handle was also found to increase with an increase of

the maximum bet limit restriction from $2 to $5.

VLT_C_SINGLE_REEL(classic slot) 2.28%VLT_T_MULTI_VIDEO(card, keno, slot) 1.73%VLT_C_SINGLE_VIDEO(multi-line slot) 1.33%VLT_C_MULTI_VIDEO(card, slot) 0.85%VLT_T_MULTI_VIDEO(card, keno) 0.80%

10 Long-run elasticity computed as: 15/(11), where 1 and 15 are given in Equation 1 with corresponding values inTable 1.11 Long-run percent change in handle for each machine type is computed as: [exp(i/(11)(0.01)) 1]100, i 16, 20, where iand 1 are given in Equation 1 with corresponding values in Table 1.12 Although the win percent could vary by machine, the aggregate win percent remained fairly constant over the study period.

780 R. Thalheimer


9/20

With respect to the parimutuel-specific variables,

VLT handle was found to increase at a decreasing

rate with the number of parimutuel wagering days

and the number of full-card simulcasts per wagering

day. The long-run demand elasticities with respect to

parimutuel wagering days and full-card simulcastsper wagering day were 0.5413 and 0.44,14 respectively.

To show the importance of the parimutuel

wagering product to VLT handle, consider that

while the average number of parimutuel wagering

days per week did not vary greatly over the study

period, full-card simulcast per wagering day

(FULLCARD) at Mountaineer Park did vary

greatly, increasing from 4 per day over the first

12 months to 18 per day over the last 12 months.The impact on VLT handle from increasing the

intensity of the full-card simulcast product over the

study period was estimated to be 94.8%.15

Table 1. VLT wagering demand model (dependent variable: LRPCHAND_VLT)

Variable Coefficient SE t-Statistic Prob.

C 9.2670 4.8872 1.90 0.0586LRPCHAND_VLT(1) 0.3799 0.0354 10.74 0.0000JAN 0.1262 0.0283 4.46 0.0000FEB 0.1792 0.0288 6.23 0.0000MAR 0.1718 0.0270 6.36 0.0000

APR 0.2033 0.0265 7.67 0.0000MAY 0.1447 0.0315 4.60 0.0000JUN 0.1417 0.0292 4.85 0.0000JUL 0.1859 0.0268 6.94 0.0000AUG 0.2030 0.0277 7.33 0.0000SEP 0.1312 0.0246 5.33 0.0000OCT 0.1488 0.0242 6.14 0.0000NOV 0.0744 0.0244 3.05 0.0024HOLIDAY 0.1463 0.0145 10.10 0.0000LRPCI 0.5408 0.5109 1.06 0.2905LVLTS 0.2241 0.0420 5.33 0.0000VLT_T_MULTI_VID(card, keno) 0.4963 0.0675 7.36 0.0000VLT_T_MULTI_VID(card, keno, slot) 1.0629 0.0947 11.23 0.0000VLT_C_SINGLE_REEL(classic slot) 1.4005 0.1433 9.78 0.0000VLT_C_SINGLE_VID(multi-line slot) 0.8194 0.2135 3.84 0.0001

VLT_C_MULTI_VID(card, slot) 0.5262 0.1841 2.86 0.0045VLT_BETLIMIT2TO5 0.0645 0.0281 2.29 0.0224VLT_LODGETOTRACK 0.0534 0.0192 2.78 0.0057LDAYSPARI 0.3328 0.1206 2.76 0.0061LFULLCARD 0.2750 0.0397 6.92 0.0000LIVECARD 0.1957 0.0437 4.48 0.0000RLIVEPURSE 2.80E-07 4.80E-07 0.58 0.5592STAKE_WVDRBY 0.0040 0.0465 0.09 0.9312STAKE_KYDRBY 0.0590 0.0398 1.48 0.1384STAKE_PREAK 0.0566 0.0398 1.42 0.1553STAKE_BELMONT 0.0047 0.0380 0.12 0.9020STAKE_BRCUP 0.0542 0.0334 1.62 0.1056BADWEATH 0.6632 0.0978 6.78 0.0000

Summary statistics:Observations 443

Observations adjusting endpoints 442Adjusted R2 0.990F-statistic 1368Prob(F-statistic) 0.00BreuschGodfrey LM test statistic 0.64Prob(LM test statistic) 0.42

13 Long-run elasticity computed as: 23/(11), where 1 and 23 are given in Equation 1 with corresponding values inTable 1.14 Long-run elasticity computed as: 24/(11), where 1 and 24 are given in Equation 1 with corresponding values inTable 1.15 Long-run percent change in handle computed as: [exp((24/(11))(ln(FULLCARD{18}) ln(FULLCARD{4})) 1]100,where 1 and 24 are given in Equation 1 with corresponding values in Table 1.



10/20

Video lottery terminal wagering was found to

increase with the number of live race days. The

presence of one live race day per week was found to

increase VLT handle 4.6%.16 The number of live race

days per week varied from 0 to 7 over the study

period. The maximum impact on parimutuel handle

from offering live race wagering can be computed by

comparing the absence of live racing to offering it

each day of the parimutuel wagering week. This is

estimated to be 37.1%.17 From these results it can be

seen that the presence of the horse racing and

wagering resulted in a large increase in the demand

for VLT wagering.18

Each of the VLT-specific demand variables were

subject to government restrictions at some time over

the study period. The effect of lifting government

restrictions on the VLT product over the study

period is now examined. As a result of petition by

the racino to relax the restriction on the number of

VLTs, the number of VLTs was increased from the

original 400 permitted by the West Virginia Video

Lottery Act in 1994 to 3000 by the end of the

study period. This increase in the number of VLTswas estimated to result in a 107.1% increase in VLT

handle.19

The effects on VLT handle of lifting restrictions on

machine types with associated changes in their

relative distribution over time are given in Table 2.20

Upon passage and implementation of the West

Virginia Lottery Act in 1994, all of the VLTs were

ticket-out, multi-game, video machines with card and

keno game options without slot game options,

VLT_T_MULTI_VID(card, keno). Eventually, as

permitted by changes to the Lottery statutes, a

video slot machine game option was added to each

of these machines, VLT_T_MULTI_VID(card, keno,

slot) replacing all of the original no-slot machine

game option machines. The decline in the relative

share of the original machines from 1 to 0

accounts for the negative impact on handle shown

in Table 2. None of the remaining machine types was

permitted in 1994 and all were phased in at various

times over the study period due to changes in

statutory provisions of the West Virginia Lottery

Act. The joint impact on VLT handle from permit-

ting changes in VLT types relative to the initially

permitted ticket-out, multi-game, video machines

with card and Keno options is computed to be

178.3%.21

The lifting of the statutory restriction on placement

of VLTs between the lodge and racetrack resulted

in the VLT lodge-to-track ratio being increased

from the government imposed 1 : 1 in 1994 to thecustomer determined 3.4 : 1 after the restriction

was lifted. This ability to change the relative VLT

placement from racetrack to lodge resulted in

a 23.0% increase in VLT handle.22 Finally,

the effect of changing the government restricted

maximum bet per play from $2 to $5 is computed

to be 11.0%.23

Table 2. Impact on VLT handle of lifting government restrictions on machine type, 19942002

Machine-type Share (1994) Share (2002) Individual impact(2)

VLT_T_MULTI_VID(card, keno) 1.000 0.000 48.5%VLT_C_SINGLE_REEL(classic slot) 0.000 0.368 129.5%VLT_T_MULTI_VID(card, keno, slot) 0.000 0.246 52.5%VLT_C_SINGLE_VID(multi-line slot) 0.000 0.227 34.9%VLT_C_MULTI_VID(card, slot) 0.000 0.159 14.5%

16 Long-run impact of one live day computed as: [exp((25/(11))LIVECARD{1/7}) 1]100.17 Long-run percent change in handle computed as: [exp((25/(11))(LIVECARD{1}LIVECARD{0}) 1]100, where 1and 25 are given in Equation 1 with corresponding values in Table 1.18 To test the robustness of the positive relationship between the parimutuel variables and VLT handle, Equation 2 was re-

estimated without LVLTS. The coefficients of LDAYSPARI, LFULLCARD and LIVECARD, all remained positive andsignificant.19 Long-run percent change in handle computed as: [exp((15/(11))(LVLTS{3000}LVLTS{400})) 1]100, where 1 and15 are given in Equation 1 with corresponding values in Table 1.20 Long-run impacts computed using: exp((i/(11))(si,2002si,1994)) 1, i 16, 20, where i and 1 are given in Equation 1with corresponding values in Table 1. Si,2002 and si,1994 are shares of each machine type as shown in Table 2.21 Joint long-run percent change computed as: [exp((i/11))(si,2002si,1994)) 1]100, i 16, 20, where 1 and i are given inEquation 1 with corresponding values in Table 1. Si,2002 and si,1994 are shares of each machine type as shown in Table 2.22 Long-run percent change in handle computed as: [exp((21/(11))(VLT_LODGETOTRACK{3.4})VLT_LODGETOTRACK{1})) 1]100, where 1 and 21 are given in Equation 1 with corresponding values in Table 1.23 Long-run percent change in handle computed as: [exp((22/(11))(VLT_BETLIMIT2TO5{1}VLT_BETLIMIT2TO5{0})) 1]100, where 22 and 1 are given in Equation 1 with corresponding values in Table 1.

782 R. Thalheimer


11/20

Parimutuel demand model

The parimutuel wagering demand model is given in

Table 3. The estimated equation fits the data well

with an adjusted R2 of 0.85. The equation is

statistically significant. The BreuschGodfrey LM

statistic indicates the absence of serial correlation.

Of the 27 variables, all but JAN and

VLT_BETLIMIT2TO5 were significant at the 5%

level or lower. VLT_BETLIMIT2TO5 was significantat the 9% level.

Parimutuel wagering is positively related to the

stochastic trend variable. This indicates that variables

not specifically included in the equation, such as

capital improvements made over the period, had a net

positive effect on parimutuel handle. Parimutuel

wagering was found to increase at a decreasing rate

with an increase in market area per capita personal

income. The long-run elasticity of market area per

capita personal income was 0.86.24

Parimutuel wagering was found to increase at a

decreasing rate with the number of pari-mutuel

wagering days and the number of full-card simulcast

racetrack programs imported to the racino per

wagering day. The long-run demand elasticities with

respect to the number of pari-mutuel wagering days

and the number of full-cards simulcasts per day were

0.54 and 0.17, respectively.25

Table 3. Parimutuel wagering demand model (dependent variable: LRPCHAND_PARI)

Variable Coefficient SE t-Statistic Prob.

C 11.7675 2.5982 4.53 0.0000LRPCHAND_PARI(1) 0.0999 0.0309 3.23 0.0013JAN 0.0417 0.0245 1.70 0.0897FEB 0.2304 0.0256 9.00 0.0000MAR 0.2356 0.0255 9.24 0.0000

APR 0.2467 0.0254 9.71 0.0000MAY 0.1785 0.0325 5.50 0.0000JUN 0.2152 0.0288 7.46 0.0000JUL 0.3289 0.0278 11.85 0.0000AUG 0.3025 0.0282 10.72 0.0000SEP 0.1829 0.0246 7.42 0.0000OCT 0.1481 0.0235 6.32 0.0000NOV 0.0912 0.0240 3.80 0.0002HOLIDAY 0.1346 0.0144 9.37 0.0000LDAYSPARI 0.4867 0.1097 4.44 0.0000LFULLCARD 0.1490 0.0310 4.81 0.0000LIVECARD 0.7129 0.0445 16.02 0.0000RLIVEPURSE 1.46E-06 4.68E-07 3.12 0.0019STAKE_WVDRBY 0.2599 0.0458 5.67 0.0000STAKE_KYDRBY 0.3942 0.0406 9.71 0.0000

STAKE_PREAK 1.86E-01 0.0403 4.60 0.0000STAKE_BELMONT 1.49E-01 0.0378 3.95 0.0001STAKE_BRCUP 0.2472 0.0334 7.41 0.0000VLTS 1.74E-04 2.91E-05 5.97 0.0000VLT_BETLIMIT2TO5 0.0236 0.0237 1.00 0.3196VLT_LODGETOTRACK 6.27E-02 1.25E-02 5.00 0.0000LRPCI 0.7781 0.2733 2.85 0.0046BADWEATH 0.7661 0.0970 7.90 0.0000

Summary statistics:Observations 443Observations adjusting endpoints 442Adjusted R2 0.850F-statistic 93.5Prob(F-statistic) 0.00BreuschGodfrey LM test statistic 1.81

Prob(LM test statistic) 0.18

24 Long-run elasticity computed as: 14/(11), where 14 and 1 are given in Equation 2 with corresponding values inTable 3.25 Long-run elasticities computed as: 18/(11) and 19/(11), where 18, 19 and 1 are given in Equation 2 withcorresponding values in Table 3.



12/20

The number of pari-mutuel wagering days was

relatively constant over the study period. The impact

on parimutuel handle from increasing full-card

simulcasts from 4 to 18 per day was estimated to be

28.6%.26

Parimutuel wagering was found to increase with

the number of live race days per week. The presence

of one live race day per week was found to increaseparimutuel handle by 12.0%.27 The maximum

impact on parimutuel handle from offering live race

wagering every day of the week relative to its absence

was estimated to be 120.8%.28

On-track parimutuel wagering on all sources, live

and full-card, was found to increase with an increase

in average live race purse. The long-run live race

purse elasticity at the mean was computed to be 0.076

indicating that total (full-card plus live) handle is very

inelastic with respect to a change in live race purse.29

The presence of a stakes race of regional or national

importance was found to positively impact wagering

demand in each case. The respective impacts on

parimutuel handle, for the corresponding week

during which the stakes races were conducted, were

estimated to be, 33.5% for the West Virginia Derby,

54.9% for the Kentucky Derby, 22.9% for the

Preakness Stakes, 18.1% for the Belmont Stakes

and 31.6% for the Breeders Cup Stakes.30

Relaxing restrictions on the VLT variables which

were subject to government restrictions resulted in

decreases in parimutuel handle. Parimutuel handle

was found to decrease with an increase in the number

of VLTs. The long-run demand elasticity with

respect to the number of VLTs, valued at the studyperiod mean, was 0.25.31 As a result of petition by

the racino to relax the restriction on the number

of VLTs increasing them from 400 to 3000 over

the study period, on-track parimutuel handle was

estimated to have decreased by 38.6%.32

Lifting restrictions on the relative placement of the

VLTs between the Lodge and racetrack resulted in a

decrease in on-track parimutuel handle of 15.4%.33

Finally, lifting restrictions on the maximum bet per

play from $2 to $5 resulted in a 2.6% decrease in

parimutuel handle.34

V. Summary and Conclusions

A pilot program with a limited number of VLTs

conditionally permitted at Mountaineer Park

racetrack in West Virginia was begun in 1990 under

the auspices of the State Lottery. Declaring the pilot

project a success, the West Virginia Video Lottery

Act was passed in 1994 marking permanent

slot machine gaming at West Virginia parimutuel

racetracks, subject to local referendum.

Demand models were estimated for the two racinoproducts, video gaming and parimutuel wagering, at

Mountaineer Park. Data were weekly from July 1994

to December 2002. Over that period real VLT handle

grew 1.580%. The demand models fit the data well.

Real per capita VLT handle was found to increase

at a decreasing rate with the number of VLTs. Each

of the VLT-specific demand factors included in the

VLT wagering demand equation was subject to

government restrictions over the study period.

Following is a summary of the effect on handle of

relaxing these restrictions on the VLT factors over the

study period:

Availability of VLT types 178.3%Number of VLTs 107.1%VLT lodge-to-track placement ratio 23.0%Bet limit $2 to $5 11.0%

26 Long-run percent change in handle computed as: [exp((19/(11))(ln(FULLCARD{18)) ln(FULLCARD{4})) 1]100,where 19 and 1 are given in Equation 2 with corresponding values in Table 3.27 Long-run percent change in handle computed as: [exp((20/(11))(LIVECARD{1/7})) 1]100, where 1 and 20 are givenin Equation 2 with corresponding values in Table 3.28 Long-run percent change in handle computed as: [exp((20/(11))(LIVECARD{1}LIVECARD{0})) 1]100, where 20and 1 are given in Equation 2 with corresponding values in Table 3.29 Long-run elasticity computed as: 21/(11)(RLIVEPURSE{mean}), where RLIVEPURSE{mean} is the sample mean,

21 and 1 are given in Equation 2 with corresponding values in Table 3.30 Long-run percent change computed as: [exp(i/(11)) 1]100, where 1 and i, i 22, 26 are given in Equation 2 withcorresponding values in Table 3.31 Long-run elasticity computed as 15/(11)(VLTS{mean}), where VLTS{mean} is the sample mean, and 1 and 15 aregiven in Equation 2 with corresponding values in Table 3.32 Long-run percent change in handle computed as: [exp((15/(11))(VLTS{3000}VLTS{400})) 1]100, where 1 and 15are given in Equation 2 with corresponding values in Table 3.33 Long-run percent change in handle computed as: [exp((16/(11))(VLT_LODGETOTRACK{3.4})VLT_LODGETOTRACK{1})) 1]100, where 1 and 16 are given in Equation 2 with corresponding values in Table 3.34 VLT_BETLIMIT2TO5 was not significant at the 10% level. Long-run percent change in handle computed as: [exp((17/(11))(VLT_BETLIMIT2TO5{1}VLT_ BETLIMIT2TO5{0})) 1]100, where 17 and 1 are given in Equation 2 withcorresponding values in Table 3.

784 R. Thalheimer


13/20

It is interesting to note that lifting restrictions on

the type of machines available resulted in the largest

impact on VLT handle. Allowing management to

more freely react to changes in consumer demand by

lifting government restrictions on each of the

factors limiting VLT play resulted in large increases

in VLT handle over the study period. The joint or

combined effect of relaxing all of these restrictions isestimated to be 687%.35 The finding that government

restrictions may severely limit growth in gaming

handle was also found to be the case in earlier studies

(Nichols, 1998a, 1998b; Thalheimer and Ali, 2003).

Availability and intensity of the parimutuel wager-

ing product when offered jointly with VLT wagering

product was found to result in significant increases in

VLT wagering. For example, increasing the number

of full-card simulcasts at the racetrack from other

locations from 4 to 18 per day resulted in a 94.8%

increase in VLT handle over the study period.

The presence of live racing each day of the parimutuelwagering week relative to its absence would increase

VLT handle by 37.1%.

Parimutuel wagering demand was found to have a

positive relationship to all of the parimutuel demand

variables. Product availability as reflected by the

number of parimutuel wagering days, the number of

full-card simulcasts per parimutuel wagering day, and

the presence of live racing on a parimutuel wagering

day were all found to have large impacts on

parimutuel wagering demand. For example, increas-

ing the number of full-card simulcasts from 4 to

18 over the study period resulted in a 28.6% increase

in on-track handle. The presence of live racing eachday of the parimutuel wagering week relative to its

absence would increase total (live plus full-card)

handle 120.8%.

Since a statutory portion of VLT revenue is

dedicated to purses to promote the horse racing and

breeding industries, the effect of purses on parimutuel

handle is of particular importance. Live race purse

elasticity with respect to total (live plus full-card)

handle was found to be 0.08, highly inelastic.36 In an

earlier study of a portfolio of live and full-card

simulcast programs at a single racetrack location

(Ali and Thalheimer, 2002) median average purse

elasticity over a combination of live and full-card race

programs was also found to be highly inelastic at

0.15. In contrast to the effect of changes in average

purse, the presence of a stakes race of regional or

national importance was found to have a large

impact on parimutuel handle. The impact varied

from 18% to 55% for total on-track wagering over

the week in which the race was held. This is in linewith earlier studies of the demand for parimutuel

wagering (Thalheimer and Ali, 1992, 1995a, b, c;

Ali and Thalheimer, 1997, 2002; Thalheimer, 1998).

It is important to note that while parimutuel

wagering is highly inelastic with respect to average

purse, the large increase in purses at Mountaineer

Park enabled the racetrack to sell the simulcasts of

its live races to other racetracks throughout the

country. Inclusion of the off-track component of

handle was beyond the scope of this study largely

due to lack of data availability from the many off-

site racetrack locations. Prior to 2001, Mountaineerdid not export the simulcasts of its live races to

other racetracks. Prior to 2001, Mountaineer did not

export the simulcasts of its live races to other

racetracks. In 2001, export simulcast handle was

$186.5 million, increasing to $268.3 million in 2002,

reflecting the increase in quality of races and the

associated interest of off-site locations in offering

those races to their patrons. This is a significant new

source of handle. On-track handle was just 1.5% of

total (VLT plus parimutuel) racino handle in 2002.

Even with the additional 9.3% of total racino

handle generated by wagering on export simulcastsof Mountaineers live races, total parimutuel handle

(on-track plus export) was just 10.8% of total racino

handle. The revenue picture is very different since

revenue per dollar of export handle is much lower

than that for on-track revenue.37 In 2002, export

simulcast revenue was just 3.4% of total racino

revenue. On-track parimutuel revenue was 3.5% of

total racino revenue.38 The sum of the two

parimutuel wagering revenue sources, on-track and

export, was just 6.9% of total racino revenue

reflecting the dominance of VLT gaming in the

overall racino operation.

35 The joint long-run percent change in VLT handle can be computed as: [exp( i/(1 1)(xi,2002 xi,1994)) 1]100, i 15, 22,where 1 and i are given in Equation 1 with corresponding values in Table 1. xi,1994 and xi,2002 are the variables of interest.Due to the logarithmic equation specification, this formula can be also be written as: [(1 g1)(1g2 ).. (1gn) 1]100, wheregi is the computed growth rate for variable xi: exp(i/(11)(xi,2002xi,1994)) 1.36 The elasticity of total (live and full-card) handle is computed relative to live race purse. It is expected that the elasticity oflive race handle relative to live race purse would be greater than elasticity relative to total handle.37 Revenue per dollar of export parimutuel handle, approximately 3% of the amount wagered, is much smaller than revenueper dollar from on-track handle.38 On-track parimutuel revenue is computed using a weighted takeout rate of 21% (23% for live race wagering and 20% foron-track simulcast wagering after payment of a 3% host fee to the sending racetrack).



14/20

Parimutuel wagering demand was found to be

inversely related to the number of VLTs. The

long-run demand elasticity with respect to the

number of VLTs, valued at the study period mean,

was 0.25. Relaxation of restrictions on the

VLT-specific variables resulted in significant

decreases in parimutuel handle. Following is a

summary of the effect on handle of relaxingthose restrictions over the study period:

Lifting government restrictions on the number of

VLTs, increasing them from 400 to 3000, resulted in

the largest reduction in parimutuel handle. Allowing

racino management to configure the VLTs in

response to customers preferences resulted in lower

parimutuel handle, as parimutuel customers found it

more convenient to participate in the VLT games.

The joint effect of relaxing government restrictions

on the number, location and maximum bet per play

of the VLTs was estimated to have reduced on-track

parimutuel handle by 49%.39

While the effect of government restrictions on the

demand for wagering is the focus of this article, a

referee has pointed out that it would be useful to

discuss the policy issue of subsidizing the race horse

industry through dedicating a statutory percentage of

VLT revenues to purses. In granting a monopoly

gaming license to the West Virginia racetracks, theintent of the State Legislature to preserve the racing

industry is clearly stated in the enabling racino

legislation contained in the West Virginia Video

Lottery Act of 1994 as follows (Chapter 29, Article

22 A-2):

The Legislature finds and declares that the existing

pari-mutuel racing facilities in West Virginia provide

a valuable tourism resource for this state and provide

significant economic benefits to the citizens of this

state through the provision of jobs and the generation

of state revenues; that this valuable tourism resource

is threatened because of a general decline in the racing

industry and because of increasing competition from

racing facilities and lottery products offered by

neighboring states; and that the survival of West

Virginias pari-mutuel racing industry is in jeopardy

unless modern lottery games are authorized at the

racetracks.

It should also be noted that while purses are an

expense to the racino operator, in this case

Mountaineer Park, they are revenues to race horse

owners and breeders. Revenues from purses for

owners with horses at the racetrack support their

racing operations. The revenue of race horse breeding

operations is dependent upon yearling demand and

supply and their direct relationship to purses

(Neibergs and Thalheimer, 1997). Revenues from

purses to owners and breeders of race horses result in

race horse industry employment in accordance with

the goal of the enabling racino legislation.

The referee raised the question as to whetherrevenues generated at the racino from subsidized

purses exceed their cost, i.e. whether the subsidy is

efficient. In 2002, purses totaled $39 million. Purses

from VLT revenues were $31 million while the

remaining $8 million came from parimutuel wager-

ing. Payments to purses from VLT revenue resulted

in an increase in average live race purse from $23 544

to $163 088 over the study period. The estimated

increase in on-track handle from this large purse

increase was only 13%40 or $1 million.41 Rearranging

average purses to include more stakes races would

increase on-track handle but the increase would still

not provide enough wagering revenue to cover the

cost of purses. On the VLT side of the racino ledger,

VLT handle was not found to increase with an

increase in purses. For these reasons, an increase in

average purses would not generate sufficient revenue

from racino wagering to offset their cost.

An additional consideration, however, must be

taken into account with respect to the VLT purse

subsidy. Since purses are necessary to conduct live

racing, it is informative to examine what would

happen if, in the extreme, the lack of subsidized

purses resulted in purses levels too low to fund

Number of VLTs 38.6%VLT lodge-to-track placement ratio 15.4%Bet limit $2 to $5 2.6%

39 The joint long-run percent change in VLT handle can be computed as: [exp(i/(1 1)(xi,2002xi,1994)) 1]100, i 15, 17,where 1 and i are given in Equation 2 with corresponding values in Table 2. xi,2002 and xi,1994 are the variables of interest.Due to the logarithmic equation specification, this formula can also be written as: [(1 g1)(1g2) . . . (1gn) 1]100, where giis the computed growth rate for variable xi: exp(i/(11)(xi,2002xi,1994)) 1.40 Long-run percent change in handle from purses computed as: [exp((21/(11))(RLIVEPURSE{$90 659}RLIVEPURSE{$15 653})) 1]100, where 21 and 1 are given in Equation 2 with corresponding values in Table 3, andthe number in brackets, {}, are real average live purse at the end and start of the study period.41 Computed as increase in 2002 on-track handle of $39 million multiplied by weighted average on-track takeout rate of 21%.

786 R. Thalheimer


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horsemens racing operations at Mountaineer. With

no live racing at the racetrack, there would be a loss

of $3.7 million in on-track wagering revenue.42 A loss

of $8.0 million in export simulcast revenue.43 and a

total parimutuel revenue loss of $12 million. Revenue

from parimutuel wagering would not offset the $31

million purse subsidy and as such the VLT purse

subsidy would be inefficient. However, it has beenshown in this article that VLT handle increases on

days when there is live racing. Using results of

Equation 1, if live racing were to cease there would be

an 18% loss in VLT handle resulting in a $40 million

VLT revenue loss.44 To the extent that live racing is

preserved, then, the VLT purse subsidy of $31 million

would generate $52 million in racino revenue and as

such the VLT purse subsidy would be efficient.

Under this scenario, the net revenue generated by the

VLT purse subsidy could be used to offset other

operating costs of the racino. Finally, while the

preservation of the race horse industry is the intent of

the enabling racino legislation, whether or not all orpart of the subsidy from VLT revenues is the best

use of video lottery revenue among competing uses is

beyond the scope of this analysis.

Acknowledgements

This article was accepted for publication, subject to

final edit, while the author was at the University of

Louisville, Louisville KY, USA. The author would

like to thank the West Virginia Racing Commission

for making available the volumes of paper output on

wagering statistics over the study period as well asproviding historical information on events that

occurred over that period. I would also like to

thank the West Virginia Lottery Commission for

making data available. Special thanks are due to

Mountaineer Park Racetrack & Gaming Resort for

allowing access to detailed company data. Special

thanks are also due to Dr M. M. Ali, Department of

Economics, University of Kentucky, for his valuable

input with respect to methodology. Finally, the

author gratefully acknowledges the helpful comments

of an anonymous reviewer. As is customary, the

author assumes full responsibility for the analysis and

the remaining errors.

References

Ali, M. M. and Thalheimer, R. (1997) Transportationcosts and product demand: wagering onparimutuel horse racing, Applied Economics, 29,52942.

Ali, M. M. and Thalheimer, R. (2002) Product choice for afirm selling related products: a parimutuel application,Applied Economics, 34, 125171.

Association of Racing Commissioners International, Inc.(2003) Pari-Mutuel Racing 2002, A StatisticalSummary, Lexington KY.

Cargill, T. F. and Eadington, W. R. (1978) Nevadasgaming revenues: time characteristics and forecasting,Management Science, 24, 122130.

Christiansen, E. M. (1989) 1988 US gross annual wager,Gaming & Wagering Business, 10, 822.

Christiansen Capital Advisors, LLC (2004) Gross AnnualWager of the United States, 2003, Table 1, New York.

Church, A. M. and Bohara, A. K. (1992) Incompleteregulation and the supply of horse racing, SouthernEconomic Journal, 58, 73242.

Coate, D. and Ross, G. (1974) The effect of off-track betting in New York City on revenues

to the city and state governments, National TaxJournal, 27, 639.

DeGennaro, R. P. (1989) The determinants of wageringbehavior, Managerial and Decision Economics, 10,2218.

Eadington, W. R. (1999) The economics of casinogambling, Journal of Economic Perspectives, 13,17392.

Gruen, A. (1976) An inquiry into the economics of racetrack gambling, Journal of Political Economy, 84,16977.

Hunsaker, J. (2001) The impact of riverboat casinos on thedemand for gambling at casino resorts: a theoreticaland empirical investigation, Managerial and DecisionEconomics, 22, 97111.

McQueen, P. A. (2001) North American gaming at aglance, International Gaming & Wagering Business, 22,456.

Morgan, W. D. and Vasche, J. D. (1979) Horseracingdemand, parimutuel taxation and state revenue poten-tial, National Tax Journal, 32, 18594.

Morgan, W. D. and Vasche, J. D. (1982) A note on theelasticity of demand for wagering, Applied Economics,14, 46974.

MTR Gaming Group, Inc., United States Security andExchange Commission, Form 10-K, Annual Report(various).

Neibergs, J. S. and Thalheimer, R. (1997) Price expecta-tions and supply response in the thoroughbred yearlingmarket, Journal of Agricultural and Applied Economics,

20, 41935.

42 Computed as actual 2002 live race handle of $16.2 million at a takeout rate of 23%.43 Computed as 2002 export handle of $268.3 million evaluated at a payment to Mountaineer of 3% of handle wagered at thereceiving racetrack.44 Computed as 2002 VLT handle of $2.6 billion multiplied by the percent reduction in VLT handle from reducing the number oflive races per wagering day from 0.63 (4.4 days per week) to 0 evaluated at the win percent of 0.085. The long-run percentreduction in VLT handle from elimination of live racing is computed as: [exp((25/(11))(LIVECARD{0}LIVECARD{0.63)) 1]10018%, where 25 and 1 are given in Equation 1 with corresponding values in Table 1.



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Nichols, M. W. (1998a) Deregulation and cross-bordersubstitution in Iowas riverboat gaming industry,Journal of Gambling Studies, 14, 15172.

Nichols, M. W. (1998b) The impact of deregulation oncasino win in Atlantic City, Review of IndustrialOrganization , 13, 71326.

Simmons, S. A. and Sharp, R. (1987) State lottery effects onthoroughbred horse racing, Journal of Policy Analysisand Management, 6, 4468.

Suits, D. B. (1979) The elasticity of demand for gambling,Quarterly Journal of Economics, 9, 15562.

Thalheimer, R. (1998) Parimutuel wagering and videogaming: a racetrack portfolio, Applied Economics, 30,53143.

Thalheimer, R. and Ali, M. M. (1992) Demandfor parimutuel horse race wagering with specialreference to telephone betting, Applied Economics, 24,13742.

Thalheimer, R. and Ali, M. M. (1995a) Exotic bettingopportunities, pricing policies and the demand forparimutuel horse race wagering, Applied Economics,27, 689703.

Thalheimer, R. and Ali, M. M. (1995b) Intertrack wageringand the demand for parimutuel horse racing, Journal

of Economics and Business, 47, 36983.

Thalheimer, R. and Ali, M. M. (1995c) The demand forparimutuel horse racing and attendance, ManagementScience, 41, 12943.

Thalheimer, R. and Ali, M. M. (2003) The demand forcasino gaming, Applied Economics, 35, 90718.

The National Association of State Racing Commissioners(1983) Pari-Mutuel Racing 1982, A StatisticalSummary.

US Department of Commerce, Economics and StatisticsAdministration, Bureau of Economic Analysis-Regional Information System, Personal Income,Total Population, & Per Capita Personal Income byCounty and Metropolitan Area, available at http://www.bea.gov/regional/reis

Vasche, J. D. (1990) The net revenue effect of Californiaslottery, Journal of Policy Analysis and Management, 9,5614.

West Virginia Code, Chapter 29, Article 22A, RacetrackVideo Lottery Act, available at http://www.legis.state.wv.us

West Virginia Lottery (2003) Comprehensive AnnualFinancial Report, Charleston, WV, pp. 151.

West Virginia Lottery Commission, on-line data, availableat http://www.state.wv.us/lottery/ridsum.htm

West Virginia Racing Commission, Charleston, WV.

788 R. Thalheimer


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Appendix

Table

A1.Datadefinitionan

dsources

Variable

Definition

Source

Marketareapopulation*

Populationofcountieslyingwithin100mileradiusof

Mountaineer.

USDepartmentofCommerce,Econom

icsandStatistics

Administration,BureauofEconomicAnalysis,

RegionalInformationSystemAnn

ual.

RPCHAND_V

LT**

RealVLThandleperunitof

marketareapopulation.

WestVirginiaLotteryCommissionw

eeklyhandle.

Populationasdefinedabove.

RPCHAND_P

ARI**

Realparimutuelhandleperu

nitofmarketareapopulation.

WestVirginiaRacingCommissionw

eeklyhandle.

Populationasdefinedabove.

JAN,

FEB,

MAR,

APR,

MAY,

JUN,

JUL,

AUG,

SEP,OCT,NOV,DEC

Month:binary(0,1)seasonalvariables.

Standardcalendar.

HOLIDAY

Nationalholiday:binary(0,1)variable,4July,Labourday,

Memorialday,MartinLutherKingday,NewYearsday,

Presidentsday,Thanksgiving,Christmas.

Standardcalendar.

RPCI**

Realpersonalincomeperunitofmarketareapopulation.

USDepartmentofCommerce,Econom

icsandStatistics

Administration,BureauofEconomicAnalysis,Regional

EconomicInformationSystemannualcountyincome.

Populationasdefinedaboveannu

al

VLTS

NumberofVLTs

WestVirginiaLotteryCommissionw

eekly

VLTdistributionbytypeand

datepermitted:

VLT_T_S

INGLE_V

ID

(pilot:card,keno,orslot)

Ratioofpilotproject-ticketou

t-singlegamevideomachinesto

totalVLTs.

MountaineerParkRacetrack&Resort,internalVLTfloor

layoutdataondatesofchange.

VLT_T_M

ULTI_VID

(card,keno)

Ratioofpilotprojectreplacem

entticket-out,multi-gamevideo

machinestototalVLTs.



VLT_T_M

ULTI_VID

(card,keno,slot)

Ratioofticket-out,multi-gam

evideomachinestototal.

Slotgameoptionaddedto

existingticket-outVLTs.



VLT_C_S

INGLE_V

ID

(classicslot)

Ratioofcoin-outsingle-game

spinningreelLasVegasstyle

slotstototal.



VLT_C_M

ULTI_VID

(multi-lineslot)

Ratioofcoin-out,singlegamemulti-paylinevideoslotsto

total.



VLT_C_M

ULTI_VID

(card,slot)

Ratioofcoin-out,multi-gamevideomachinestototal.



VLT_L

ODGETOTRACK

RatioofVLTsintheLodget

oVLTsattheracetrackfacility.

MTRGamingGroup,Inc.,Form10-K

,U.S.Securities

andExchangeCommission(various

years)and

MountaineerParkRacetrack&Res

ort,internaldata.

VLT_B

ETLIMIT2TO5

Liftingofstatutoryrestrictedbetlimitfrom$2maximumto$5

maximum.

MountaineerParkRacetrack&Resortforeffectivedate.

(continued)



18/20

Table

A1.Continued

Variable

Definition

Source

DAYSPARI

Totalparimutuelwageringda

ysperweek,full-cardor

full-cardandlive.

WestVirginiaRacingCommissiond

aily/weekly

FULLCARD

Totalnumberoffull-cardsim

ulcastprogramsperweek

dividedbyDAYSPARI


aily/weekly

LIVECARD

Totalnumberofliveraceday

sperweekdividedby

DAYSPARI.


aily/weekly

RLIVEPURSE*

Realtotalliveracepurseper

weekdividedbythenumberof

liveracedaysperweek.


aily/weekly

STAKE_W

VDERBY,STAKE_

KYDERBY,STAKE_

PREAKNESS,

STAKE_B

ELMONT,

STAKE_B

RCUP

Stakesrace.Binary(0,1)variable.Live:WestVirginiaDerby.

On-TrackSimulcast:Kentu

ckyDerby,Preakness,Belmont,

BreedersCup.

WestVirginiaRacingCommission.

BADWEATH

Badweatherdayoutlier(0,1)

forthewinterweekof9January

1999.

MountaineerParkRacetrack&Resort.

Notes:*Usedinconstruction

ofpercapitademandandincomevariables.

**Variabledefinedinrealte

rmsusingmonthlyCPI-U(19821984

100),USDepartmentofLabour,Bur

eauofLabourStatistics.

790 R. Thalheimer


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Table A2. Summary statistics

Variable Mean Minimum MaximumMean(first 12 mo.)

Mean(last 12 mo.)

POP* 8 442 262 8 393 334 8 478 657 8 471 860 8 393 334CPI* 165.1 148.4 181.3 150.4 179.9

Demand variables

HAND_VLT* $21 715 533 $961 507 $63 664 048 $2 503 118 $49 780 988PCHAND_VLT* $2.5790 $0.1135 $7.5751 $0.2954 $5.9310RPCHAND_VLT* $1.5011 $0.0765 $4.2116 $0.1960 $3.2964LRPCHAND_VLT 0.0538 2.5703 1.4365 1.6998 1.1849HAND_PARI* $783 840 $203 502 $1 290 760 $735 065 $758 600PCHAND_PARI* $0.0928 $0.0241 $0.1527 $0.0868 $0.0904RPCHAND_PARI* $0.0564 $0.0147 $0.0966 $0.0577 $0.0502LRPCHAND_PARI 2.9024 4.2209 2.3374 2.8724 3.0198

Demand determinantsLRPCHAND_VLT(1) 0.05160 2.5703 1.4365 1.7064 1.1825LRPCHAND_PARI(1) 2.9010 4.2209 2.3374 2.8734 3.0141JAN 0.0790 0 1 0.0784 0.0769FEB 0.0722 0 1 0.0784 0.0769MAR 0.0813 0 1 0.0784 0.0962APR 0.0767 0 1 0.0980 0.0769

MAY 0.0790 0 1 0.0784 0.0769JUN 0.0790 0 1 0.0784 0.0962JUL 0.0880 0 1 0.0784 0.0769AUG 0.0903 0 1 0.0784 0.0962SEP 0.0880 0 1 0.0784 0.0769OCT 0.0880 0 1 0.0980 0.0769NOV 0.0880 0 1 0.0784 0.0962DEC 0.0903 0 1 0.0980 0.0769HOLIDAY 0.1535 0 1 0.1569 0.1538PCI* $25 689 $21 510 $29 033 $21 901 $29 033RPCI* $15 525 $14 369 $16 600 $14 561 $16 139LRPCI 9.649 9.573 9.717 9.586 9.689VLTS 1313 165 2987 358 2626LVLTS 7.0278 5.1059 8.0020 5.8376 7.8680VLT_T_SINGLE_VID

(pilot: card, keno or slot)

0.0196 0 1.0000 0.1706 0.0000

VLT_T_MULTI_VID(card, keno) 0.2932 0 1.0000 0.8294 0.0000VLT_T_MULTI_VID(card, keno, slot) 0.4714 0 1.0000 0.0000 0.2462VLT_C_SINGLE_REEL(slot) 0.1223 0 0.3943 0.0000 0.3679VLT_C_SINGLE_VID(multi-line slot) 0.0411 0 0.3360 0.0000 0.2265VLT_C_MULTI_VID(card, slot) 0.0523 0 0.2110 0.0000 0.1593VLT_BETLIMIT2TO5 0.1806 0 1 0 1VLT_LODGETOTRACK 1.9720 0.4 3.4 0.69 3.4DAYSPARI* 6.89 5 7 6.37 6.98LDAYSPARI 1.9287 1.6094 1.9459 1.8492 1.9429FULLCARD* 9.95 2 21 3.99 18.36LFULLCARD 2.1781 0.6931 3.0727 1.3529 2.9069LIVERACEDAYS* 4.3 0 7 4.43 4.40LIVECARD 0.6210 0 1 0.6975 0.6300LIVEPURSE $79 411 $0 $242 500 $23 544 $163 088RLIVEPURSE $46 591 $0 $134 052 $15 653 $90 659STAKE_WVDERBY 0.0113 0 1 0.0000 0.0192STAKE_KYDERBY 0.0181 0 1 0.0196 0.0192STAKE_PREAK 0.0181 0 1 0.0196 0.0192STAKE_BELMONT 0.0181 0 1 0.0196 0.0192STAKE_BRCUP 0.0203 0 1 0.0196 0.0192BADWEATH 0.0023 0 1 0 0

Number of observations 443 443 443 51 52

Note: *Informational, not in demand models.



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