The growth of online gambling and market failure
The growth of a market for a demerit good
The online gambling industry was one of the fastest-growing markets in 2023 with an annual growth of 4.1% and is projected to achieve a worldwide revenue of US$107.30bn by the end of 2024. This growth is forecast to continue with the number of online gamblers reaching 243.2m users by 2028.
Gambling companies such as Betsson AB, 888 Holdings, The Stars Group and Bet365 have seen rapid growth in their revenues over the last three years and the overall profitability of the sector is growing in a similar way.
There are a number of factors behind the global growth in the gambling market. The development of online gambling platforms and mobile betting apps has made gambling increasingly accessible to consumers. Players can now place bets on sports events or play casino games using their phones or computers without having to go to a betting shop or casino. Gambling companies have used their online presence and their sponsorship of high-profile sports to aggressively promote their products. Many governments around the world have deregulated their betting markets and this has given more and more people the opportunity to gamble. There have also been changing attitudes toward gambling with more and more people seeing betting as a socially acceptable leisure activity.
Many economists and politicians see gambling as a demerit good because it is associated with significant social costs. For example, mental health issues, financial problems and family breakdown are some of the consumption external costs associated with problem gambling.
Governments look to intervene in the gambling market because of the negative externalities associated with the industry and because policymakers want to protect people's welfare from a good that could cause them harm. It is also the case that some politicians want to intervene in the gambling market because they question the morality of betting.
On top of taxation and regulation, behavioural economics can be used to try and tackle some of the problems associated with gambling. There are several behavioural economics ideas associated with online gambling. People often gamble more online because betting on the internet often does not feel real in the same way of using cash at a sporting event or in a casino. Many of the betting options offered to customers have complex odds which people find difficult to understand so they struggle to make rational decisions (bounded rationality). Gamblers often ‘chase losses’ when they are losing (loss aversion) and offers such as ‘free bets’ can attract consumers (framing bias).
On top of tax and regulation, policymakers can use behavioural economics to try and reduce the social costs associated with gambling by, for example, making it clear to gamblers the true odds of winning, giving users ‘cooling-off’ periods when they cannot bet and informing family members by text message if a user is gambling too much.
As gambling continues to grow in many countries it will bring with it employment opportunities, rising incomes, tax revenues and, to those who gamble responsibly, enjoyment. This growing market will, however, bring challenges governments that have to deal with.
Some possible questions for a class
1. Why is the gambling market growing?
2. Why is gambling considered to be a demerit good?
3. Why is gambling considered to be a market failure?
3. What are the consequences for economic well-being of a growing gambling market?
4. Suggest some behavioural economics policies a government might use to reduce the market failure associated with the gambling market.