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Gambling and Professional Sports

Professional sports leagues are unique business entities.

Sports leagues rely on competition to make their products interesting.

One team cannot produce a successful product alone – it must have another team, an opponent, for the product to manifest itself.

The product is the uncertainty of game outcome which in turn affects league standings – a cumulative total of individual games.

The uncertainty of game outcome is the core of the sports product and has resulted in the treatment of sports leagues as monopolies.

This monopoly status, according to sports leagues, is “necessary to bring about the ‘equalization of playing strengths among teams’ and to maintain public confidence in the honesty of the games”.

A loss in public confidence about the integrity of games can depreciate the “brand name capital of the firm” as well as the legitimacy and reputation of the league.

The biggest direct threat to the integrity of games and the legitimacy and reputation of leagues are match fixing and point shaving.

The early history of professional baseball in North America illustrates the evolution of professional sports’ position on the consequences of match-fixing.

Sobbing describes the prevalence of gambling in early professional baseball.

 In the early years, betting and match-fixing were relatively common.

 The biggest reason was low player salaries.

 A sports bettor could offer a relatively small sum of money to a player in exchange for fixing the outcome.

 The bettor would then make money from the bet, and the player would earn enough money to support himself and his family without taking a second job.

 Professionalization, in the form of regular salaries for players, arose in the 70s and while it helped to mitigate match-fixing, salaries still were not high enough to completely discourage players from throwing games.

   The event that altered the landscape of baseball was the  “Black Sox” scandal.

 The “Black Sox” scandal refers to a group of eight Chicago White Sox baseball players who took money from sports bettors in exchange for throwing the World Series, Major League Baseball’s championship series.

 The consequence for the eight players was a ban for life by commissioner Kenesaw Mountain Landis.

 The penalty was given to the eight baseball players “was taken not only to punish the misdeeds but also to deter future misconduct of the same or similar type”.

 There have been other instances of professional athletes throwing games but with the rise of professional salaries in addition to the threat of a lifetime ban, these instances are becoming less prominent.

 Recent examples include Major League Baseball player/manager Pete Rose in the 90s, when a coach bet on games involving his team, and the Serie A match-fixing scandal in 06.

   Today, the large salaries earned by professional athletes deters most throwing or fixing of games.

 However, two groups remain vulnerable to match-fixing: unpaid or relatively low-paid, low-profile athletes and referees.

 Amateur athletes, particularly those playing college athletics in the United States, resemble early professional athletes in that they are not well compensated.

 In fact, college athletes only “earn” the value of their scholarship and room and board expenses.

 Research estimates the marginal revenue product of a major college football or basketball player at close to a million dollars a year for the university that the athlete attends.

 Research examining point-shaving – a player performing in a way that leads the team to lose by less than the point spread of a game – has shown that this exists in college basketball.

   Examples of low-profile athletes fixing matches can be found in professional tennis.

 High-profile tennis players such as Roger Federer and Rafael Nadal earn salaries comparable to professional athletes in major team sports.

   However, lower-ranked professional tennis players are susceptible to match-fixing due to not only their low earnings but also because of the individual nature of the sport.

 In 07, the internet gambling company Betfair alerted the WTA about the highly suspect betting volume on a tennis match that paired a ranked player with an unranked player.

   Tennis’s governing body launched an investigation and many players stated that they were approached by bettors who were offering to pay players to fix matches.

 Robson reported that the situation “constitutes one of the direst threats tennis has faced in the post-68 professional era”.

 Since then, professional tennis has been on high alert for potential matches that have been fixed.

   The second group that can be susceptible to match-fixing is referees.

   Similar to lower-ranked tennis players and US college athletes, referee wages are low.

 In addition, referees, no matter the sport, can single-handedly affect the outcome of matches.

 Recently, two major causes of referees being found guilty of match-fixing have occurred.

 The first was in 2005 in the German Bundesliga.

 In that year, a group of referees expressed concern that another referee in the second division made calls that were deliberately determining the outcome of the match.

 An investigation determined that the referee was fixing matches for a group of Croatian bettors with ties to organized crime.

   The second incident occurred in the National Basketball Association (NBA) in North America in 07.

 Tim Donaghy, a long-time NBA official, was arrested and subsequently plead guilty to fixing games in the NBA.

 One of the games in question was a playoff game.

 A letter filed in court by Donaghy’s attorney said that “The N.B.A.allowed an environment to exist that made inside information, including knowledge of the particular officials who would work a game, valuable in connection with predicting the outcome of games”.

   As a result, the NBA made changes to many policies including the release of the names of officials working games as well as the rules governing gambling by officials.

   Match-fixing or the potential for match-fixing has existed for as long as sports have been played.

 The increases in player salaries and the professionalization of sport decreased the incentive to fix matches in some leagues.

 However, problems still exist in leagues with a wide disparity in wages as well as with referees, who earn much less than players.

   Gambling as a Benefit to Sport  Match-fixing and point-shaving clearly represent threats to sports leagues.

 As stated earlier, leagues take this matter very seriously and attempt to ensure that matches played have maximum uncertainty of outcome.

 However, sports gambling and the people who participate in the betting market are important stakeholders for sports leagues.

 Without an opportunity to gamble on sports, some forms of sports may not exist.

 Even sports that would exist without betting have been influenced in some way by the betting market.

 By offering opportunities for individuals to make bets on matches, sports betting increases the exposure of sport and the number of people consuming the sport product.

   By increasing consumption, the teams and leagues receive additional revenues from revenue streams such as media contracts and sponsorship agreements.

 In some sports, the bookmakers and sports leagues have formed explicit agreements.

  For example, three leagues in Australia – Cricket Australia, Australian Football League, and PGA Australasian Tour – have formed a profit-sharing agreement with Betfair.

 By entering into this agreement with Betfair, leagues not only receive additional revenue generated from their sports but also collaborate with Betfair if any “shady” or abnormal betting occurs in specific matches/events.

   Another positive outcome of sports betting is sports betting markets can detect any abnormal betting in matches, indicating that some type of match-fixing may be occurring.

 For example, consider the match-fixing problems in professional tennis discussed above.

 Without a sports betting market and collaboration between sports bookmakers and sports leagues, the detection of match-fixing in professional tennis might not have occurred.

 Once abnormal betting volume appears, bookmakers or gambling websites, such as Betfair, can notify the appropriate leagues.

 This occurred for the tennis match-fixing scandal and is clearly in the best interest of both the bookmaker and the league.

  The bookmaker can maximize the number of people who bet on a particular event and generate the highest profit while the league can increase consumption by offering the most uncertain outcome it can to maintain the legitimacy of the league in the eyes of its stakeholders.

 In addition to using the sports betting market to detect match-fixing, sports leagues rely on many different outlets and stakeholders (the media is an example) “to serve as watchdogs to preserve the integrity of its game.

   We motivated this paper with two types of proposed changes in the availability of sports betting opportunities: the creation of new sports betting opportunities where none previously existed and the elimination of all sports betting opportunities that have taken place recently in the US, and the proposed expansion of existing sports betting opportunities beyond the current system of state-sponsored monopoly sports betting currently in place in many EU countries.

 In both cases, the welfare of sports bettors and government revenues generated from implicit or explicit taxation of sports betting will be affected by these changes in betting opportunities.

   Who Will Bet on Sports if Betting Opportunities Expand?  Based on our analysis of the characteristics of sports bettors, annual participation in sports betting markets is low.

 Less than 5 % of the survey respondents in Canada and the UK reported betting on sports in the past year.

 Although lifetime participation may be high, casual gamblers appear to bet on sports infrequently in the UK and Canada.

 In both countries, participants were largely male, and the conditional analysis of participation indicates that participation declines with age.

 The average sports bettor in both countries had household income at or above the median household income, and the conditional analysis of participation indicates that participation increases with income.

 Thus, the typical sports bettor is a young male with a relatively high income.

  Although the annual participation rates in Canada and the UK are small, they are not zero.

 People in these three countries are interested in betting on sports, and the US is quite similar to Canada and the UK in many respects.

 This implies that a similar number of people in the US would be interested in legally betting on sports, if available.

 These potential sports bettors are either not currently betting on sports, or are betting on sports illegally.

 If they are not currently betting on sports, providing these individuals with legal sports betting opportunities will be a Pareto improvement.

  The expansion of sports betting opportunities in places like the US where sports betting was not available will likely attract a similar type of individual: young males with relatively high incomes.

 This profile of sports bettors matches the characteristics of those sports fans who watch sports on television and attend live sporting events.

 The similar characteristics of sports spectators and sports bettors also suggest that there may be important complementarities in watching sports and betting on sports.

  Who Are the Winners and Losers from Expanded Opportunities? Sports betting markets act as a check and balance system for sports leagues.

 The betting markets increase the consumption for matches and sports leagues overall.

 In some instances, sports leagues get a percentage of the profits from sports betting while also receiving information regarding potential match-fixing.

  Match-fixing and point-shaving certainly are sensitive and important issues for all sports leagues.

 However, leagues can generate policies to help minimize these threats against the integrity of the individual games and the legitimacy of the leagues.

 This includes making sure athletes, coaches, staff, and officials earn sufficient enough wages to deter them from engaging in matching fixing, and/or point shaving.

 In addition, sports leagues can also have working agreements with bookmakers as well as internal controls to detect the slightest abnormality of a game not being played to its highest uncertainty.

  The answer to this question varies in the US and the EU.

 Recall that sport betting opportunities are being made legal in the US, while in the EU the monopoly sport betting operations run by governments may be eliminated in favor of increased competition.

  In the US, legal sports betting will be offered where it was previously illegal.

  As was mentioned above, this opportunity will increase the utility of individuals who would like to bet on sports but were unable to when sports betting was illegal.

 Since sport betting in Canada, and in the US state of Montana, features extremely high takeout rates or overround, the revenues generated from sports betting should be substantial, benefiting the government and, indirectly, those who receive government-provided benefits financed by the revenues generated from sports betting.

  In addition, the government revenues generated from sports betting have two appealing features.

 First, revenues raised from sports betting constitute a “voluntary” tax in that no one is obligated to bet on sports.

 Second, the individuals who will likely participate in this activity have relatively high incomes, making this implicit tax both voluntary and progressive.

  The most vocal opponents to legalized sport betting in the US were professional sports leagues like the NFL and amateur sports organizations like the NCAA.

 Since these organizations oppose the legalization of sports betting, they would appear to lose something following the legalization of sports betting.

However, these losses are difficult to identify.

  Opponents of legalized sports betting claim that the opportunity to bet on sports corrupts participants, including athletes and officials, by creating incentives to fix games and engage in other behavior like point-shaving that reduces the perceived legitimacy of the product.

 But match fixing and point shaving appear to be rare in North American team sports, based on past cases where participants engaged in match-fixing or point-shaving were caught and punished.

 NBA referee Tim Donaghy reportedly gambled on games he officiated in the 07 seasons.

 Prior to this, no allegations of match-fixing related to gambling have been made in the four major professional sports leagues in North America in some time.

College sports, on the other hand, periodically experiences episodes of match-fixing.

 Examples of match-fixing related to gambling in the NCAA include the University of Toledo (men’s basketball and football 03–06), Northwestern University (men’s basketball, 95), Arizona State University (men’s basketball, 94), and Boston College (football, 96; men’s basketball, 78).

 However, NCAA athletes receive no compensation beyond tuition and room and board, providing NCAA athletes with an incentive to engage in this behavior.

 In addition, there are hundreds of Division I football and basketball programs in the US, compared to a few dozen professional teams in each league, providing many more opportunities for game-fixing.

   Also, good reasons exist to believe that the marginal effect of increased opportunities to bet on the sport will not affect the incentive to fix games.

 Sports betting is already legal in Nevada, and internet betting with an off-shore sportsbook is relatively easy, so any potential game fixer already has access to sports betting opportunities.

 In addition, the other existing sport betting opportunities in North America consist of “parlay” games where multiple contests must be bet on in each game.

 This clearly increases the cost of game-fixing because players on multiple teams would have to be involved.

 The expansion of “parlay” type sports betting would appear to have only a limited effect on the incentive to fix games in North America.

   Two groups would clearly lose from an expansion of sports betting opportunities in North America: illegal sports bookmakers and “offshore” internet sportsbooks that currently operate in the Caribbean and Central American countries with liberal gambling laws.

 An expansion of legal sport betting opportunities in the US would reduce the handle at these locations if the legal opportunities are substitutes for their betting options.

   In Europe, the winners and losers differ significantly.

 The clear losers will be the state-operated sport betting monopolies and the groups who receive funding generated by the rents earned by these monopolies.

 The introduction of competition in European sport betting markets, either in the form of online sportsbooks or UK-style private betting shops will reduce the monopoly rents earned by state-operated monopolies.

 The revenues from state-sponsored sport betting monopolies in Europe typically go to specific activities like the training of elite athletes or the operation of the European club sport system that trains young athletes and organizes competitions.

 These organizations will have to find new sources of funding if the rents generated from sports betting disappear.

 The equity and efficiency effects of this change are complex.

 To the extent that watching sport and betting on sport are complements, sports bettors are potentially a reasonable source of funds to subsidize the training of athletes and the organization of competitions.

 However, participation in sport may generate other important benefits to both the participants, in the form of enhanced earnings ability, and to society in the form of a healthier and happier population.

 If these benefits are important, then alternative methods of financing the training of athletes and the organization of competitions may be desirable.

   The winners in Europe will clearly include sports bettors.

 They will have access to a richer array of sports betting opportunities and will be subject to lower takeout rates and overround.

 Increased access to higher quality betting opportunities will increase the utility sports bettors get from betting and lower takeout rates and overround will reduce the effective cost of betting.

 In addition, the expansion of internet betting will reduce the transactions costs faced by sports bettors.

 These factors will increase the consumer surplus generated by sports betting in Europe.

 In addition, it is possible that the lower transactions costs generated by increased competition in sports betting markets will lead to increased sports betting in the EU.

 This could produce more revenues than the existing government-operated sports betting operations in the long run if consumers are sufficiently sensitive to the effective price of betting on sports to enter the market.