Spatial competition and cross-border shopping

Brian Knight and Nathan Schiff

No 10-1, New England Public Policy Center Working Paper from Federal Reserve Bank of Boston

Abstract: This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identification strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these effects is large, suggesting that states do face competitive pressures from neighboring lotteries, but the effects vary significantly across states.

Keywords: Gambling industry; Consumer behavior (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-com, nep-mkt and nep-ure
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Citations: View citations in EconPapers (5)

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