Betting on Perfect Competition

One of the annual rituals for A2 Economics teachers is the lesson when we cover the assumptions that lie behind the model of perfect competition and ask the perennial question - are there any real-world industries that come close to this particular market structure?

In the past I have used local fruit markets, clusters of nightclubs or bars in busy tourist venues and auctions for newly caught fish as examples of markets which satisfy some of the criteria needed for perfect competition to exist. It allows one to discuss the importance of low entry and exit costs into and out of the market; the significance of many sellers supplying essentially homogeneous products and the role that price transparency plays in shaping the incentives of buyers and sellers.

A colleague suggested to me a few weeks ago that his local racecourse provided a suitable example to use. He is often to be found at summer and early autumn meetings after school in the evening, enjoying the occasional bet, a stunning location but more importantly the chance to watch competitive markets in action - namely on-course betting!

Consider a small to medium sized racecourse with a dozen or more independent bookmakers.

The suppliers are selling what amounts to the same product - a bet is a bet

Price information is more or less immediately available to all market participants - both bookmakers and punters

Punters have plenty of choice about which bookmaker to use, the costs of searching for price information are very low

Many of the bookmakers (although running their own book) will follow the prevailing odds on the racecourse - a form of passive price taking

I asked my students whether this was sufficient to apply a perfectly competitive tag. Here are some of their responses:

One or two of the bookmakers will have sufficient market share / influence to set prices and then watch others follow - price leadership

Bookmakers require a licence to operate (a barrier to entry) and the racecourse may restrict the number of pitches available

Many of the agents in the market have inside information be it about form or other factors that might impact on the outcome of the race

There are different types of bet - product differentiation is part of the competitive process

The fact that bookmakers continue to earn good money in the long run (supernormal profits) is indicative of barriers to competition

I am sure there are many other points that can be made - please add yours to the blog!

What about betting exchange such as BetFair?

I was intrigued to read a feature on one of the founders of BetFair who says that it was learning about the principles of perfect competition in his economics lessons at school has provided the germ of an idea for what has proved to be a revolution in online betting. Here is the article