Thursday, April 30, 2020

Price Controls for Racing - 15% Across the Board Takeout Anyone?

In this COVID world where up is down so often, we've been reading quite a bit about price controls - i.e., governments, not the market setting prices.

In one such instance, San Francisco recently capped what food delivery companies can charge restaurants in commission at about 15% (below the regular charges of 20-30%) hoping to "help restaurants".

Uber Eats and Door Dash, as you may know, charge a delivery fee as well as a commission to restaurants for their gross profit (about $8 on a $60 order). The consumer gets hot food at their door, via an app where we can follow progress, and which also allows us to pay seamlessly. The restaurants don't have to pay drivers, insurance and worry about load.

This is a relatively nascent business with both delivery companies losing money, and the ecosystem finding its feet.

Now, like with most price controls you may ask yourself - why would the Mayor of San Francisco get involved at all?

Uber, to increase demand, has been waiving delivery fees already. This means you and I can order from restaurants and get our food cheaper.

But what about the restaurants? They are paying Uber mostly the same rates (eating into the restaurants margins), but because it's not  monopoly we have someone else to fill that void. Door Dash, rather than having the consumer pay, sensed a growth opportunity giving half their margin back to restaurants, delivering $100M back to their 150,000 partners. They sliced their commission rates to less than 15%, done before any price control.

These two companies are - like Amazon 25 years ago - marketing through margin and price (not advertising), with two different tactics. One to the end user, one to the supplier. Prices have come down during the COVID crisis and delivery can be expanded, not curtailed, which (theoretically at least, this is a new market mechanism) is good for the consumer and restaurant. And it didn't take a politician to make it so.

Meanwhile, let's shift to horse racing.

What if, say congress, through this Jockey Club sponsored legislation on lasix and a hundred other things, passed price controls on takeout. No track could charge 15% or more on any bet.

Don't laugh, it's been done, in free market Australia, where the rate cap was 16%. Remember the 0% takeout Fat Quaddies? That was to give the excess (charged over 16%) takeout back to the customer. 

First off it'd be good, right? 15% is less than the blended 22% we currently pay (top line, leaving aside rebates for this example) so the consumer wins.

Would supply, like with Uber Eats stopping delivery to some areas in San Francisco with this decree,  fall? Would tracks show fewer races? Likely not.

Would demand fall? No, the prices are lower. Demand would rise.

Would tracks do this on their own, i.e. like how Uber and Door Dash pricing mechanisms changed through good old-fashioned competition? No, they would not. Tracks have had literally 50 years to do this themselves and they've moved takeout up, not down. They don't compete on price, they follow each other around setting prices, like a Standard Oil monopoly.

Should we as players support a price control for racing?

I can't do it, because I hold out hope. Hope for expanded rebates; hope for a better pricing; hope for dynamic price by bet, like lower takeout for win place and show. I hope for optimal pricing.

But, this business, running their psuedo-monopoly-average-cost-pricing model is completely unlike the nascent food delivery business. And I must admit, it's a hell of a lot better of a candidate for government intervention through price ceilings. I'm sure - frustrated like many of you are at this business - there are more than a handful of you ready to dust off the Socialist Party ID's. Who can blame you.

Have a nice Thursday everyone. 

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