Betting Exchanges Impact Upon Consumer Welfare - Essay Example

Running Head: Team Sports Economics Betting Exchanges Impact upon Consumer welfare in sports betting Industry s Introduction Betting exchanges are the advanced, innovative and enhanced version of the sport bookmakers (Jones et al, 2006, p112). These exchanges are based upon the concept of providing a platform to the sports betting consumers where the bettors and layers could approach and interact with each other to place bet over the upcoming outcome of the sports event (Niall, 2008, p3). The consumers are required to get register with the betting exchange by submitting a deposit to initiate the process of betting and laying. The exchanges charge up to 5% commission to the winning party and provide wide array of exclusive services and information to the consumers (Michael, 2009, p2). The issue of increased consumer welfare within the sports betting industry due to betting exchanges has been examined by the social scientists and empirical researchers from varied perspectives (e.g. Bird and McCrae, 1987, p1552; Tuckwell, 1983, p106; Bolton and Chapman, 1986, p1040; Hurley and McDonough, 1995, p949; Sung et al, 2005, p75). It is revealed that the betting exchanges offer wide array of benefits to the consumers however, at the same time, there are some disparaging issues that lower down the credibility of the betting exchanges (Michael, 2009, p2). The dominating school of thought argues that the betting exchanges work significantly to increase the welfare of the consumers of the sports betting industry because these exchanges offer certain unique opportunities and options that were not available to the consumers through traditional bookmakers (Hurley and McDonough, 1995, p949). This impression is supported by a growing body of evidences that substantiate the significance of betting exchanges for the sports betting industry. The following essay aims to examine the extend up to which the betting exchanges have contributed towards the enhancement of consumer welfare in the sports betting industry. The essay discuses the issue in references to different research works and empirical studies conducted around the topic. It is revealed that the betting exchanges have radically added to the welfare of the sports betting industry consumers as they allow them to avail different unique and superior options for betting upon forthcoming results of sports event. Evolution of Betting Exchanges Gambling is not a new phenomenon for the sport industry because it is supposed to be as old as the society. There used to be thousands of betting shops in different areas of UK owned by independent bookmakers. Soon, these shops were merged to form the book maker chain that acquired strong power and influence in the market (Sobel and Raines, 2003, p371; Snowberg et al, 2005, p366). The rapid advancement of new technology during the last two decades allow the evolution of betting exchange that was widely welcomed as new business model for sports betting industry. In 2004-2005, it was estimated that the betting exchanges have generate £4,352 million turnover in UK (Sung et al, 2005, p75). At present there are some established companies operating in the industry and provide the betting exchange service to the consumers like Betfair, Betson, Betdaq, Intrade UK, Bet and Game and Betmate UK (Michael, 2009, p2). The basic purpose of the batting exchanges in to provide people an opportunity to come in contact with other people ready to offer the same price that they want to bet upon the upcoming results of an event (Bolton and Chapman, 1986, p1040). The two parties involved in this process are called backer; the person who bets, and the layer of the bet; the person who offers the identified sum of money. Internet has further added to the unique advantages of betting exchanges because the consumers could acquire complete updated information about the prices for the runners through the websites and thus, they become able to offer competitive prices. The betting exchanges are different from the bookmakers in so many ways. The bookmakers set nominal odds for the bettors whereas the exchanges provide the consumers information platform from where they could offer or accept the odds from the third party (Gruca and Berg, 2007, p 219). In this way, the exchange merely acts a broker and brings bettors and layer together at a platform. The settlement risks are also minimized because the exchanges transfer the betting funds to secure holding account to ensure the confidentiality of the settlement process. Moreover, the commission rate of the betting exchange in considerable lower than that of the profit margin of the book makers (Sung et al, 2005, p65). The emergence of the booking exchanges have contributed towards the removal or minimized role of traditional bookmakers from the sports betting industry. As compared with the bookmakers, the exchanges provide consumers more choices, value and transparency due to which the consumers are more attracted towards these exchanges and give less preference to the bookmakers (Vaughan and Paton, 1997, p150). The betting exchanges also encounter strong wave of criticism and opposition. As they have removed the role of traditional bookmakers and have caused the decline in their inflated margins, the giant bookmakers and monopolies view these exchanges great threat to their existence and profitability (Cain et al, 2001, p97). Due to this reason, there are campaigns also run against the betting exchanged to regard them as illegal and ethically unacceptable for the sports industry. Despite all this opposition, the exchanges are efficiently working and expanding their network with each passing day (Jones, et al, 2006, p112). Betting Exchanges and Consumer Welfare These exchanges are widely regarded as a tool of recuperating the consumer welfare in the sports industry and there are wide array of exclusive benefits identified by the experts to affirm the significance of betting exchange. It is unveiled that the consumers of sports betting industry are benefited by these exchanges in so many different ways because these exchanges allow consumers to avail wide array of exclusive services and betting opportunities (Law and Peel, 2002, p327). The role of betting exchanges in fostering the consumer welfare has been proved by certain research studies. Smith et al, (2006) explains that the traditional bookmaker possess superior betting skills as compared with the betting exchanges to persist the negative return to bettors but if the entire issue is viewed from the standpoint of consumer welfare, it is found that there are certain utilities exclusively offered by the betting exchanges that the bookmakers don’t provide to the consumers like consumption utility from placing wagers, monetary return utility etc. Based on this analysis, Smith et al (2006) affirm that the betting exchanges are better for the consumers as they increase their welfare by providing them several opportunities (Niall, 2008, p3). .The bettors are benefited from the system because they become approachable for anyone offering the specified amount of money. As compared with conventional bookmakers, the exchanges reduce the relative difference between the odds and best price. The betters are also enabled to place their bits instantly along with having interaction with the layers. The exchanges allow the consumers to pick up their desired position of backer of layers as per their own wish. Moreover, the consumers are enabled to both back and lay the same event at different times. This option is not available through the traditional bookmakers. (Smith et al, 2006, p 673-689) The betting exchange is a new way to add excitement to the sports events. When the consumes are allowed to bet or lay through these exchanges in more vivacious, systematic and swift manner, their involvement and interest in the sports event and betting process increases and they find it more convenient and enthralling to get engaged in the betting process (Klemperer, 2004, p76). The impact of increased involvement and excitement of the consumers will ultimately have an obvious and positive impact upon the potential sports revenues because more sponsors will be attracted towards the event after realizing the increased consumer interest in the event. It implies that the betting exchanges are not only beneficial for the consumers but in broader perspective, they are advantageous for the sports industry as well (Vaughan and Paton, 1997, p150). The betting exchanges allow the consumers not only to bet or lay on any upcoming result of the sport event but also provide the consumers a facility to routinely monitors the changes within the prices through internet and execute the bets or lay bets on the basis of latest position. The members of certain betting exchange could also place bets from their mobile phones. This facility has further added to the flexibility and efficiency of the betting exchanges because the bettors could become part of the betting process even without having immediate access to the internet (Michael, 2009, p2). Conclusion The above discussion aims to examine the role of betting exchanges in increasing the consumer welfare in sports betting industry. It is revealed from the discussion that the betting exchanges provide wide array of benefits and they are beneficial for the consumers in some many ways. In broader perspective, they have advantageous for the entire sports betting industry as well because they could be sought as great source of inducing excitement in the game. The increase in turn over generated by the betting exchanges also affirms that the consumers widely deem these exchanges a useful and better betting system. Thus, it could be sum up that the betting exchange considerably increase the consumer welfare in sports betting industry by proving them broad array of superior facilities. References Bird, R., McCrae, M., (1987). Tests of the efficiency of racetrack betting using bookmaker odds. Management Science, 33 (12), 1552-1562. Bolton, R.N., Chapman, R.G., (1986). Searching for positive returns at the track: a multinomial logic model for handicapping horse races. Management Science, 32, 1040-1060. Cain, M., Law, D., Peel D.A., (2001). The relationship between two indicators of insider trading in British racetrack betting. Economic, 68, 97-104. Gruca, T.S. and Berg, J.E. (2007). Public information bias and prediction market accuracy. Journal of Prediction Markets, 1 (3), 219-231. Hurley, W., McDonough, L., (1995). A note on the Hayek hypothesis and the favourite-longshot bias in pari-mutuel betting. American Economic Review, 85 (4), 949-955. Jones, P., Turner, D., Hillier, D. and Comfort, D. (2006) ‘New Business Models and the Regulatory State: A Retail Case Study of Betting Exchanges’, Innovative Marketing, 3, pp. 112-119 Klemperer, P., (2004). Auctions: Theory and Practice. Princeton, NJ: Princeton University Press. Law, D., Peel, D.A., (2002). Insider trading, herding behaviour and market plungers in the British horse race betting market. Economic, 69, 327-338. Michael A. (2009). Forecasting Horse Race Outcomes: New Evidence on Odds Bias in UK Betting Markets, International Journal of Forecasting forthcoming Michael A., Paton, D., Vaughan, L. (2008). Bookmakers Possess Superior Skills to Bettors in Predicting Outcomes? Journal of Economic behaviour and Organisation, forthcoming. Accepted September 2008 Niall.A.OConnor (2008) "Betting Exchanges - Disruptive innovation at work". (Bettingmarket.Com). Snyder, W.W., (1978). Horse Racing: Testing the efficient markets model. Journal of Finance, 33 (4), 1109-18. Smith, M.A., Paton, D., Vaughan Williams, L., (2006). Market efficiency in person-to-person betting. Economica, 73, 673-689. Snowberg, E., Wolfers, J. and Zitzewitz, E., (2005). Information (in) efficiency in prediction Markets. In L. Vaughan Williams (Ed.), Information Efficiency in Financial and Betting Markets. Cambridge: Cambridge University Press, 366-86 Sobel, R.S., Raines, S.T., (2003). An examination of the empirical derivatives of the favourite–longshot bias in racetrack betting. Applied Economics, 35, 371–85. Sung, M., Johnson, J.E.V., Bruce, A.C., (2005). Searching for semi-strong inefficiency in the UK racetrack betting market. In: Vaughan Williams, L. (Ed.), Information Efficiency in Financial and Betting Markets. Cambridge: Cambridge University Press. Tuckwell, R., (1983). The thoroughbred gambling market: efficiency, equity and related issues. Australian Economic Papers, 22, 106-108. Vaughan Williams, L., Paton, D., (1997). Why is there a Favourite-Longshot Bias in British Racetrack Betting Markets? Economic Journal, 107, 150-158. Read More