The Effect of Casino Proximity on Lottery Sales: Zip Code-Level Evidence from Maryland 10 th European Conference on Gambling Studies and Policy Issues Helsinki, Finland 11 September 2014 Douglas M. Walker and Will E. Cummings

Background Maryland lottery established in 1973 Annual Sales reached $1 billion in the 1990s, then more – But traditional products began to decline in early 2012 Maryland’s first casino (Hollywood) opened in 2010 Except for Virginia, Maryland is surrounded by casino states – Delaware – West Virginia – Pennsylvania – New Jersey & Ohio also in the region 211 September 2014Casino Proximity and Lottery Sales

Map of Northeast USA 11 September 2014Casino Proximity and Lottery Sales3

Figure 1. Annual lottery sales in Maryland and states nearby (excludes VLT sales) Data source: LaFleur’s 2009 World Lottery Almanac, LaFleur’s Magazine, and state lottery annual reports. 11 September 2014Casino Proximity and Lottery Sales4

Figure 2. Maryland and nearby casinos 11 September 2014Casino Proximity and Lottery Sales5

Background, continued Study purpose: Analyze lottery sales data to determine if/how lottery has been affected by casinos in and around Maryland – We also analyze proximity of casinos on lottery sales Lottery data provided by Lottery’s vendor, Scientific Games – Vendor-level monthly sales data on 17 lottery games offered – July 2009 through February 2014 Data begin over 1 year before first Maryland casino opened 11 September 2014Casino Proximity and Lottery Sales6

Casinos in Maryland Four casinos operating during sample period 2014 FY revenues of $833.3 mn – VLT revenue: $578.4 mn – Table game revenue: $254.9 mn Horseshoe Baltimore opened August 26 MGM National Harbor to open in September 2014Casino Proximity and Lottery Sales7

Hollywood Casino Perryville, MD Opened September 27, 2010 – 1,500 machine games (since reduced) – 22 table games (added March 2013) FY 2014 revenues of $85.7 mn 11 September 2014Casino Proximity and Lottery Sales8

Casino at Ocean Downs Berlin, MD Opened January 1, 2011 – 800 machine games – No table games (yet) FY 2014 revenues of $52 mn 11 September 2014Casino Proximity and Lottery Sales9

Maryland Live! Casino Hanover, MD Opened June 5, 2012 – 4,332 machine games – 177 table games FY 2014 revenues of $754.4 mn 11 September 2014Casino Proximity and Lottery Sales10

Rocky Gap Casino Resort Flintstone, MD Opened May 21, 2013 – 550 machine games – 10 table games FY 2014 revenues of $41.2 mn 11 September 2014Casino Proximity and Lottery Sales11

Lottery trends Data indicate positive sales trend until early 2012, then sales begin to decline Downward trend continues through end of sample period “Monitor” and “Monitor” games appear to have most negative trends 11 September 2014Casino Proximity and Lottery Sales12

Figure 3. Total monthly sales, all Maryland lottery games 11 September 2014Casino Proximity and Lottery Sales13

Table 1. Lottery game groups 11 September 2014Casino Proximity and Lottery Sales14

Figure 4. Total monthly sales, by game type 11 September 2014Casino Proximity and Lottery Sales15

Table 2. Review of literature 11 September 2014Casino Proximity and Lottery Sales16

Tools for analysis Software allows us to sort lottery retailers/ sales by county or zip code – ZipCTAs – populated zip codes, data from Easy Analytic Software – Scientific Games provided county, zip code We also use “travel time” – Calculated using Microsoft MapPoint software – Sample spot-checked by hand with MapQuest and Googlemaps 11 September 2014Casino Proximity and Lottery Sales17

Scale of analysis Lottery sales data are monthly, by retailer Should we analyze casino effect by county, zip code, or individual retailer? – Maryland counties are large, and Maryland Live is near border of three counties – Zip code-level analysis is possible and provides a more ‘micro’ view of effects – Retailer-level would be extremely complicated and tedious, with few advantages 4 million data points… 11 September 2014Casino Proximity and Lottery Sales18

“Simple” analysis We compare lottery sales for periods before and after casinos opening – County-level sales data Analyze trends in lottery sales, by game Results are mixed – Table summarizes (next slide) 11 September 2014Casino Proximity and Lottery Sales19

Table 3. Summary of apparent near-term impacts on local lottery sales 11 September 2014Casino Proximity and Lottery Sales20

Econometric analyses Model explains “change in sales” (Δ Sales) over the same month the year before Controls for other factors that might affect lottery sales This is the first study to explain lottery sales using an intra-state casino proximity variable – Other studies found negative impact from adjacent state casinos 11 September 2014Casino Proximity and Lottery Sales21

The model Explanatory variables: – “change in gravity” (Δ Gravity) over the same month the year before “Gravity” = 1/travel time – Zip code fixed effects – Time period fixed effects The model: Δ Sales$ i,t = Constant + Δ Gravity i,t + ε i,t (Constant = Zip fixed effects + Time fixed effects) 11 September 2014Casino Proximity and Lottery Sales22

Table 4. Basic regression results 11 September 2014Casino Proximity and Lottery Sales23

Interpretation of results Gravity coefficients are negative and significant Interpretation of coefficients for panel data (many zips, 56 time periods) isn’t intuitive We show the results in terms of the impact of a casino opening within certain travel times to an “average” zip code – Results are relative to baseline in which the closest casino being 75 minutes away 11 September 2014Casino Proximity and Lottery Sales24

Figure 5. Impact of new casino opening on Δ Monthly Sales for the “average” zip code (relative to the closest casino being 75 minutes away) (A) $ impacts 11 September 2014Casino Proximity and Lottery Sales25

Figure 5. Impact of new casino opening on Δ Monthly Sales for the “average” zip code (relative to the closest casino being 75 minutes away) (B) % impacts 11 September 2014Casino Proximity and Lottery Sales26

Casino-specific effects We next model the incremental impact on the lottery from each casino individually Variables are casino dummies multiplied by Δ Gravity – This isolates the Δ Gravity in each month to the casino responsible for the Δ Gravity Model is again run for each type of lottery game: Δ Sales$ i,t = Constant + Δ Gravity + (Hollywood dummy * Δ Gravity) + (Ocean Downs dummy * Δ Gravity) + (Maryland Live dummy * Δ Gravity) + (Rocky Gap dummy * Δ Gravity) +  i,t 11 September 2014Casino Proximity and Lottery Sales27

Table 5. Casinos’ marginal effects regression results Instant MonitorPickMulti-StateOther Constant (0.0041) (0.6672) (0.0587) (0.0000) (0.0012) Δ Gravity (0.0912) (0.1402) (0.0503) (0.0002) (0.9215) Hollywood * Δ Gravity (0.5437) (0.9804) (0.3644) (0.0002) (0.5953) Ocean Downs * Δ Gravity ) (0.0001) (0.0307) (0.9452) (0.1979) (0.1320) Maryland Live * Δ Gravity (0.0000) (0.0021) (0.9432) (0.4087) (0.0000) Rocky Gap * Δ Gravity (0.4677) (0.0022) (0.0132) (0.0000) (0.0015) n 16,403 R2R September 2014Casino Proximity and Lottery Sales28

Monetary estimates from results We calculated the impact of all Maryland casinos on annual lottery sales – Based on last full year of sales data (3/13 – 2/14) – Δ Gravity from first to last period, mult. by Δ Gravity coeff from Table 4 (aggregate regression) Next we calculated impact of each casino on annual lottery sales – Δ Gravity plus marginal impact coeff of each casino (from Table 5), multiplied by Δ Gravity 11 September 2014Casino Proximity and Lottery Sales29

Table 6. Estimated impact of all Maryland casinos on annual lottery sales ($ millions) 11 September 2014Casino Proximity and Lottery Sales30

Table 7. Estimated impacts of individual Maryland casinos on annual lottery sales ($ millions) 11 September 2014Casino Proximity and Lottery Sales31

Forecast of new casinos’ impacts Lastly, we forecasted the likely impacts of the Horseshoe Baltimore (opened 8/26/14) and MGM National Harbor (to open summer 2016) – Assume that each casino has marginal impacts similar to Maryland Live casino – Both new casinos are in populous areas, like Maryland Live 11 September 2014Casino Proximity and Lottery Sales32

Table 8. Forecasted impact of two new casinos on annual lottery sales ($ millions) 11 September 2014Casino Proximity and Lottery Sales33

Conclusion Existing casinos have caused a decline in annual lottery sales of $44-50 million Two new casinos expected to cause decline in lottery sales of another $45 million Total casino impact on lottery around $95 million, around 5.5% This is the first study to analyze… – Effect of casino proximity on lottery sales – Impact of casinos on individual lottery game types The model could be applied to other jurisdictions Follow-up research on net tax impact of new casinos 11 September 2014Casino Proximity and Lottery Sales34

Contact information Doug Walker Professor Department of Economics College of Charleston 66 George St. Charleston, SC USA Will Cummings President Cummings Associates 135 Jason St. Arlington, MA USA 11 September Casino Proximity and Lottery Sales