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Tuesday, June 28, 2011

Optimal Takeout May Lead to New Approaches

Today, Pull The Pocket has an excellent entry regarding what is the optimal takeout.  I will leave it to you to read his column (us bloggers need to stick together) but the truth is the basic law of economics determines what the optimal takeout rate is for each wager.  Unfortunately, I will leave it to the experts to go into detail as it has been a while since I took my Economics 101 course in college. 

Here is the million dollar question.  What does racing do if the optimal takeout rate does not cover the costs for putting on 'the show'?  Racing could go out of business or change the way it presents the show by reducing costs (purses).  Well certainly no one who reads this blog wants to see racing go out of business so the question must be asked if the optimal price (takeout) is charged, and the costs producing a horse race exceeds the the price you can charge, what do you do?  Let's consider the options. 

But before we discuss the options, we must acknowledge that slot revenue upsets basic economic principles in providing subsidies which throws the basic economic laws out the window.  However, sooner or later the decision will be made (it has to) that the cost of producing the show with subsidies exceeds the demand and is not a good use of capital and the subsidies will be cut off).   It is not a question of 'if'; it is only a question of 'when', so sooner or later basic economic law will need to be addressed.

So what are the options if the cost of producing racing exceeds the optimal price?

  1. Cut costs in the form of reducing purses.  This is unacceptable as under the current model where owners pay all the costs including training and vet bills, the risk will outweigh the potential reward; hence the exodus of horse owners.
  2. Cut costs in the form of training and driver fees.  This is unacceptable as while the owners will be happy to pay less money for training and driving, the amount of purse money needed to make owning a horse profitable would allow a purse cut.  Of course, that produces an exodus of trainers and drivers who will no longer be able to pay their expenses or make it worth their time to participate in the sport (once again the risk/reward ratio gets thrown out of wack).
  3. Do nothing nad let fre market rules apply.  Tracks will close until we get to the ideal number of tracks needed to support the demand.  This will cause a wholesale departure of harness racing employees and need for horses.
With neither approach desirable, it is time to look outside the box for a new model which works; one that takes advantage of economies of scale. What can they be?

  1.  A modified Macau (a racetrack in a former Portugese colony off China; a gambling mecca)  model.  Racetracks hire trainers, drivers, and grooms and vets and pays them salaries.  Owners who decide to race at a particular track will be assigned to a specific trainer or given a choice of  trainers who have openings in their stable.  Owners will not have to pay for the trainers or drivers, but just vet bills  In effect, a limited lease of horses.  Since their costs are lower, the purses can be significantly lower as the risk is much less.  To encourage the best efforts from trainers and drivers, the tracks will pay them a bonus if their horses win.  The downside is there will be less need for trainers and driver as tracks are not going to hire an excessive number of them; hiring just enough to handle the tracks' racing stock. 
  2. Similar to idea #1, the only difference is the racetrack owns the horses and assigns them to trainers and drivers on their salary.  As before, the trainers and drivers are salaried employees of the racetrack and purses become virtually non-existent; after all the tracks own the horses.  The only purse money needed would be to pay bonuses for trainers and drivers to offer them incentives.  Of course, the downside is with tracks owning the horses, the breeding industry would be seriously hurt as there would be a limited number of purchasers for horses.  As before, there will be plenty of drivers and trainers who will be out of business as well. as the demand for them is reduced as tracks will not hire more than they need to operate.
The point is when racing finally gets down to seriously look at the future of racing, and the optimal pricing of racing is known, the fact is the old model of putting on the show may no longer be efficient which is not sustaining.  If that is the case, racing needs to look at the alternatives.  It may be the options outlined above, it may be something different.   One thing for sure, the way things are being done now is not efficient.

Tough decisions indeed.  Leaders deal with the issues head on.  Cowards hide their heads in the sand.  Let's see what happens when the time comes for a serious study.

There is an article in The Roar, an Australian webstie talking about the decline of thoroughbred racing.  While it talks about the runners, many of these issues can apply to standardbred racing and not only there, but in North America.  Funny thing is the very steps racing has been taking to get the younger generation involved in racing (an occasion to drink ala the Preakness), isn't working there so it probably wouldn't work in the States either.  It is worth a read.

1 comment:

The_Knight_Sky said...

PacingGuy wrote: What does racing do if the optimal takeout rate does not cover the costs for putting on 'the show'?


That is precisely what is preventing further exploration by track owners and horsemen, they do not want to face the truth that their livelihoods are in jeopardy.

Inevitably that ugly monster is going to rear its head above the water and attack the most vulnerable participants in the horse racing industry.

As of Pull the Pocket's column, my tip of the cap to bloggers like him who understand that the optimal takeout rates for each individual wagering pool must be set.

Obviously it gets complex when average field size and pool size is factored in but the solution undoubtedly is takeout rates that are far lower than today's rate. The public is finding it a difficult product to participate and enjoy. That was not the case in the 40s, 50s and 60's when the taekout rates were drastically lower.