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The economics of Las Vegas
Casino/hotels invest resources to keep you within their space, so you will gamble on behaviorally tempting negative-sum games. This means excellent food at bargain prices, and of course disorientating space designs as well. No one can find their way through a big casino for the first time without getting confused.
These two features -- food quality and imperfect mobility -- are two sides of the same coin. You are more likely to gamble where you eat, so they win back your culinary gains on the slot machines. If gambler mobility increases enough (e.g., Las Vegas now has a monorail), the quality of casino food will decline. There is no point in luring in those who will not stay.
For the pure non-gambler such as myself, it is the cross-subsidies which make the city attractive. I get the lower prices and never cough the money back up at the slot machines.
Would more mobility across casinos make me better off? On one hand, more mobility would mean more freedom of choice. I would no longer be stuck in the hotel restaurant, unwilling to navigate the casinos and the deliberately unsynchronized traffic lights along the main road. Yet the macro-state of being stuck (ex post, but not ex ante, when choosing a hotel) also delivers, in competitive equilibrium, lower prices and higher quality for the meals I want. Do I love or hate this unusual trade-off? Is this how life in a gilded cage would feel?
How can non-casino restaurants survive here? They must compete against highly subsidized competition. Yet the range and quality of non-casino places is first-rate. Does this mean that restaurants elsewhere could be better -- essentially for gratis -- if only they had to try harder? Have we found "X-Inefficiency" within the restaurant industry?
I've opened up the comments section.
Posted by Tyler Cowen on July 4, 2005 at 05:57 AM in Economics | Permalink
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Comments
Great post Tyler, really got me thinking over here. ;-)
Never been to Vegas, but I know a ton of people love it. Like you, gambling really does nothing for me.
Chris
http://amateureconblog.blogspot.com
Posted by: Christopher Meisenzahl at Jul 4, 2005 8:14:10 AM
Might it not also be a case of untraded interdependicies (or perhaps else a relatively captive workforce) particular to an isolated area with so many good restaurants?
Posted by: passerby at Jul 4, 2005 8:28:54 AM
It seems to me that the trend in Vegas lately is to open amazing new restaurants (versions of hard to get into restaurants from New York, San Fran, LA, etc.), and to offer exclusive reservations and free meals to known gamblers.
The ability to track play by players (through players cards, etc.), has allowed casinos to become very good at directing and rewarding their players. So now, rather than opening up the buffet at an inexpensive price and hoping people will stick around, newer casinos in Vegas offer rooms/food/etc. only to gamblers who they have tracked, and turn the faucet of goodies off as soon as the play stops.
In fact, the new Wynn casino is brighter, more colorful, and less confusing, and contains some excellent restaurants.
Better than any other business, perhaps, Vegas now knows their customers -- and knows who to comp.
Posted by: Jake Walker at Jul 4, 2005 8:30:46 AM
Just some ideas off the top of my head:
1. I imagine that there are a lot of tourists in Vegas which results in a
lot of restaurant meals bought per person allow good customer turnover for
a large number of independant restaurants.
2. Perhaps many tourists think the low cost of meals in casios indicates
they will be of low quality and so decide to eat at outside restaurants?
3. Casino meals may cater to the median punter, leaving lots of room for
independant restaurants to cater to more specialized tastes.
4. In another post you mentioned that you have never intuitively
understood the attraction of gambling. I cheerfully admit my thoughts may
be of no help, but for what they are worth here they are:
One could consider a lot of animal behavior to be a form of gambling. For
example searching for food would generally be a positive sum game. However,
competition, or drought, or overpopulation, etc. could make finding food
become a negative sum game resulting in an animal burning more calories
searching for food than it finds. However, not searching for food isn't
an option because that will definately result in starvation, whereas to
keep searching may result in the animal getting lucky. For a human
playing a slot machine, I think the occaisional win feels like a big
reward for minimal physical effort. Unless the gambler thinks carefully
about his or her actions they may feel at an emotional level that gambling
is a worthwhile activity. Thinking carefully is something that is
probably discouraged in Los Vegas. Personally I think carefully about
winning and losing, so I never gamble. But I do admit to not thinking
carefully about what I put in my mouth, and so I am fat.
Posted by: Ronald Brak at Jul 4, 2005 8:36:52 AM
Good post (no surprise) and good comments. Here are two further thoughts:
1. W/r/t the restaurants, one (relatively small) factor may be that there is little overlap between the population that goes to good restaurants and the population that considers eating in the hotel as a real option.
2. W/r/t gambling (which has never attracted me, either), there seems to be a basic, human appetite for the moderately challenging activity (sort of what Carlyle referred to as "a Turkish bath for the mind"). Betting (like many other games, especially video games) is interactive ("hot" in Marshall McLuhan's terms) but not really mentally taxing. Success is easy to measure, feedback is fast, the surprises remain within a predictable range, and some skill, but not a lot of it, is required.
Posted by: John P. at Jul 4, 2005 10:02:16 AM
I'm sorry but I think you may have it backwards to some extent.
If you look at the income statements of the major gaming companies, they make much if not most of their money not from gaming but from the non-gaming ancillaries: hotel RevPAR, food, show tickets, merchandising. It's entirely incorrect to suggest that casino restaurants are "subsidized" by the casino operations.
Recall that essentially all table games are loss leaders after expenses (e.g., dealers, pit bosses, drinks, comps, etc.); only slots contribute a significant gross margin (i.e., are "negative sum games") and I'm not sure your analysis applies to them.
You're also ignoring the role of conventions -- there's a significant "oligopoly-oligopsony" interaction, rather than the "monopolistic competiiton - price taker" scenario you're positing.
P.S. You absolutely MUST go to the new Hofbraeuhaus on Paradise Road whenever you're in Vegas. Ausgezeichnet!
Posted by: KipEsquire at Jul 4, 2005 10:04:03 AM
Can't say for sure - never been to Vegas and not a gambler (in its strictest sense anyway), but seems plausible there are
enough permanent residents in Vegas (yes, there is such a genre) who want an alternative to the "touristy" restaurants
of casinos, despite the implicit subsidy.
Posted by: Bex at Jul 4, 2005 12:01:18 PM
I'm not sure that the quality of casino-subsidized restaurants vs. independent restaurants even factor into the equation:
"Las Vegas was built for people who are really bad at math...."
- Penn Jillette (Penn & Teller, now at the Rio!)
Posted by: Peter Gerr at Jul 4, 2005 12:51:24 PM
All the major strip casinos are owned by one of two companies (MGM-Mirage and Caesar's/Harrah's). So the mobility offered by the Monorail is mostly illusiory. This is more clear when you look at the older trams, that only connected hotels that were adjacent and owned by the same group at the time they were built, e.g. Mandalay Bay-Luxor-Excalibur, or Bellagio-Montel Carlo, which don't even stop at intervening properties. (They are now owned by MGM Mirage.)
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Posted by: asstraffic at Jul 4, 2005 4:14:32 PM
Kip Esquire is correct. Cross-subsidization has been dead for years.
Posted by: Mark Shroder at Jul 4, 2005 5:11:52 PM
It's probably ten years since I've been to Las Vegas, but I don't recall being all that impressed with the restaurants. Lots of pretension, yes, but the food seemed mediocre even at highly touted places. Why should it be better? People planning a trip to Las Vegas aren't usually focused on the cuisine.
One thing I recall is that the big hotels all had "exclusive" restaurants in-house, with exorbitant prices. My impression was that virtually all the customers were being comped, so the prices were mostly a way to make them feel they were being treated royally.
Posted by: Bernard Yomtov at Jul 4, 2005 5:17:14 PM
You neglected one of the other important attributes of most of the casinos -- lack of cues about the time of day. No outside windows, no clocks. People who have been up for 24 hours or longer tend to make worse decisions...
Posted by: Michael Cain at Jul 4, 2005 5:36:02 PM
Casino restaurants have to be all things to all people, and hence end up being mediocre at everything and outstanding at nothing. Other resturants can attract customers by specializing.
People who want to save money on food will eat at home. So, people who live in Las Vegas will pay a premium to go to a better resturant. Visitors do not have the option of eating at home, and might therefore be more likely to eat at casinos -- especially if the casinos drew them to Las Vegas to begin with.
BTW, why is gambling negative-sum? If the gambler's loss is the casino's gain, isn't that zero-sum?
Posted by: Spiro Agnew at Jul 4, 2005 9:39:58 PM
"BTW, why is gambling negative-sum? If the gambler's loss is the casino's
gain, isn't that zero-sum?"
Hahaha! Good point. But for me gambling in a casino is a negative sum
game. (Never been good at counting cards) Also, part of the winnings has
to disapear into casino overhead and company profit, so winnings will be
less than the amount of money put in, so it's fair to call it a negative
sum game. Gambling with friends would be a zero sum game, for the total
winnings will equal the money put in. Investing in the stock market is a
positive sum game because, over time, the "winnings" will on average be
more than the original stakes.
Posted by: Ronald Brak at Jul 5, 2005 12:08:11 AM
I think in order to answer this we need to know; is comparable food really cheaper? During my first trip to Vegas (about six months ago) I was disappointed by the prices of food and drinks which I thought to be the same as any other major metropolitan city.
Another thought; many of the restaurants already exist in other cities. Entry costs are thus pretty low. Also, because these are well-known resataurant, Casinos are, I believe, at least subsidizing the construction costs/rent, however, not necessarily subsidizing marginal costs. My point is that, if prices are lower, it could be simply because the industry is closer to perfect comp. than other restaurant markets.
Posted by: josh at Jul 5, 2005 8:42:24 AM
I'll agree with the posters who disagree with the premise of the question--my experience in Vegas is that the food is neither better nor cheaper than it is elsewhere. I usually found it a better deal to go to the chain restaurants in the malls on the Strip than to eat at the casinos.
Posted by: mschrist at Jul 5, 2005 8:55:47 AM
Maybe Tyler would care to reveal where this subsidized food is being served. I live in Vegas and generally avoid spending money on the strip, since it is always more expensive there. Maybe Tyler is thinking about the buffets that might be a good deal in some casinos.
Many of the restaurants in the big swanky casinos are reputed to be world class. Bradley Ogden, inside Caesar's Palace, for example - 'the first Las Vegas restaurant to be given the prestigious "Best New Restaurant 2004" award by the James Beard Foundation.' Try the unsubsidized $150 Kobe beef.
Posted by: Tim Shell at Jul 5, 2005 9:16:44 AM
The new monorail is a true blessing to convention goers who stay in the strip hotels and need to get to the Las Vegas Convention Center. Taking a taxi or convention busses was a nightmare. I generally found I could get to the convention center faster on the monorail than someone driving their own car from the MGM Grand.
Posted by: Mr. Econotarian at Jul 5, 2005 10:42:10 AM
Oh I almost forgot, the monorail was built completely with private funds. You will no doubt hear this in the continuous advertainment audio played in the monorail during the trip...
Posted by: Mr. Econotarian at Jul 5, 2005 10:45:48 AM
>BTW, why is gambling negative-sum?
The old proverb refers: "The game's not worth the candle".
Posted by: dsquared at Jul 5, 2005 11:30:55 AM
The only five-star restraunt I've regularly eaten at is on the Mississippi gulf coast. I moved out of the area just before the casinos went in. We went back once some years later & I asked the owner if the casinos had hurt business. He said that he actually thought he was doing better.
So the oft-repeated niche argument seems to hold up...
Posted by: Nathan Zook at Jul 5, 2005 12:03:54 PM
As a behavioral economist who grew up in Las Vegas, I’ll throw in my 2 cents. Although it’s an overgeneralization, I’d say there are two main types of restaurants on the strip, designed to appeal to two types of customers. The high-end national name establishments (e.g., Le Cirque), which are a recent phenomenon in Vegas, appeal to the free-spending tourists. These are people who come to Vegas chasing the “what happens here stays here” motto. Although they may stick to budgets at home, they take an attitude of living it up while on vacation – sort of a mental accounting approach, where any expense can be justified by virtue of being in Vegas. Since these folks are not concerned about budget - they might even be disappointed at not living it up with an expensive dinner – they’re very happy to visit the famous name restaurant and spend a lot. The type of big spender that Jake Walker aptly describes fits into this group. This behavior also contributes to KipEsquire’s observation that hotels now make more from food (and other stuff) than gaming these days.
On the other hand, there are the within-casino restaurants that are very heavily subsidized – the most obvious example being the big buffets. Although they certainly attract a large number of guests from within the hotel, I think that their real target is people seeking a cheap meal who might not otherwise be in that casino. My best anecdotal evidence is that these cheap buffets are even more prevalent at the casinos in the city suburbs than they are downtown. Who are they trying to attract? Local citizens, for one, who may or may not be escorting out-of-town guests. Convention-goers, who often stay at non-casino hotels, also fit here. Locals can eat at any of a million nearby restaurants, but the cheap food at the casinos does draw them in. And they inevitably drop some money into the slots on their way in or out of the buffet.
So, my theory comes down to this: the high-quality restaurants, although cheaper than you might find in other cities, can still charge a significant amount to the freewheeling tourists who are ignoring their budget; the cheap (but still tasty) buffets focus instead on attracting people who would not otherwise walk into the casino.
By the way, food has definitely gotten more expensive in Vegas over the past 15-20 years. As teenagers, we would all go to the casino buffets for dinner, especially the $4 buffet at Circus Circus. You can’t even get fast food for those prices. Being underage, we never played the slots so the casino wasn’t making it back from us. (Even if we had been tempted to play, casino security is very aggressive when it comes to minors at the machines. We knew better than to try.) It might not have been a free lunch, but it was pretty darn close!
Posted by: SShu at Jul 5, 2005 12:32:01 PM
Fine dining restaurants essentially all lose money on food, once labor and overheard are taken into consideration, or break even at best. Their profits come on the beverage side, particularly in the sale of wines at around 80-150% markup over retail price--and probably 100-200% markup on what the restaurant paid--with minimal attendant costs: storage, stemware, loss due to corked/rejected bottles, sommelier, staff training, etc. (It is an interesting question why customers are willing to pay so much for wine in restaurants. Presumably because it is worth it to them to accompany their food with good wine, and because the barriers to entry are high--namely having an excellent restaurant with which to surround your wine service.)
So "ordinary" diners--those who tend to spend around the same or a bit less on their wine than their food--are subsidized by those who accompany basically the same food with big name wines costing hundreds or even thousands of dollars a bottle; with after dinner drinks, etc. The higher the ratio of fat cats to average joes, and the more extravagent their orders, the better the deal the food and service can be.
This is why most of the top fine dining restaurants in America are clustered in Midtown and Downtown New York, land of expense accounts and wealthy sophisticates. And it's why even the top New York and California chefs and restauranteurs have been flocking to Las Vegas over the past decade to open outposts of their famous flagships. High rollers and relatively wealthy folks on vacation are just the sort to spend big on vanity purchases like expensive wines, not to mention luxury ingredients like truffles and caviar and "Kobe" beef (which almost always is not).
This is not to say that Las Vegas actually does offer a better fine dining food value than New York, or, say, San Francisco. But it's certainly true that almost every hot chef in the country is lending his name to something down there.
Posted by: Dave H at Jul 5, 2005 1:11:01 PM
Gambling is only negative-sum if you leave out the crucial "enjoyment" payoff that the gambler recieves. For instance put $5 down on a football game btwn two teams you know nothing about, and suddenly you transformed the event into more excitement than any movie playing in the theatres will provide you with (and for considerably cheaper).
Gambling in Las Vegas is no different than renting jet ski's at the beach. It is exciting and takes the edge off of life. It is an investment in happiness. Happiness in turn makes an individual more efficient and effective when he returns to normal life. Thus, although a losing-gambler has less money, he has acquired an asset that previously did not exist, while the money he spent has been transfered to the casino-- meaning the transaction is (like all trade) positive-sum.
In defense of why a rational person might gamble: if the happiness asset of gambling is equal to the asset produced from renting a jet ski, the person should choose the former because a gamble has the potential (even if low) of rewarding the player with his original investment plus a return.
Posted by: M.E.T at Jul 5, 2005 4:34:35 PM
