Gravity models and casino gaming: A review, critique, and modification

AbstractGravity models have been widely used in expanded gaming debates to persuade investors that proposed casinos will be financially successful and to persuade state and local government officials, as well as a skeptical public, of the economic and fiscal benefits of casino gaming. However, most people involved in the decision-making process understand very little about the internal mechanics of these models and how they generate financial forecasts, estimates of customer visits, and projections of new job creation. In fact, the gravity models used in market feasibility studies for the casino industry are proprietary models that remain closely guarded secrets of the industry and its consultants. The purpose of this article is to open the use of gravity models to critical scrutiny by reviewing their origins, development, and limitations. A second purpose is to illustrate our main thesis by analyzing gravity models deployed in the New England expanded gaming debates. The authors offer a proposed modification to the calculation of gravity factors to account for the growing importance of non-gaming amenities.Keywords: Gravity Model; Huff Model; Casino IndustryThe Basic Facts of Expanding GamingIn the United States today, there are 492 commercial casinos and 448 Indian casinos hosted by 37 states as compared to less than half that number of casinos in two states in 1988 (AGA, 2013). However, after twenty-five years of expanded gaming legislation at both the state and federal levels, nearly half (46%) of all commercial casinos are now located in non-traditional jurisdictions (i.e., outside Nevada and New Jersey) and, if one includes Indian casinos, then seventy-two percent (72%) of all U.S. casinos are now located in non-traditional jurisdictions (AGA, 2012, pp. 12-22; Meister, 2012, pp. 15, 73). The percentage of adults who gambled at a casino at least once in the previous year climbed from 17 percent in 1990 to 32 percent in 2012, when 76.1 million Americans made more than 400 million visits to casinos (Harrah's, 2006; AGA, 2013, p. 3). Moreover, since the early 1990s, when new casinos began opening in non-traditional jurisdictions, nearly 82 percent of the increase in casino visitations has occurred in non-traditional casino jurisdictions, which now also account for 49 percent of casino gross gaming revenues (GGR) nationally. If Class III Indian casinos are factored into the equation, non-traditional venues now account for 69 percent of casino GGR nationally (AGA, 2012, pp. 12- 22; Meister, 2012, pp. 15, 73).During this time, the debates over expanded gaming from state to state have been remarkably similar because its proponents have offered the same two rationales for policy change in every jurisdiction: new tax revenues and economic development (i.e., jobs) (Evart, Treptow, and Zeitz, 1997, p. 425). The same two rationales structure debates about individual casino projects regardless of their type or location. Casino revenue and operating forecasts, as well as projections of new job creation, are normally based on market feasibility studies that depend on gravity models. Government officials want to know how much tax revenue proposed casinos will generate, while citizens want to know how many and what types of new jobs will be created by a casino. Chambers of commerce and restaurant associations are often concerned about the potential impact of casinos on the local lodging, food and beverage, and retail sectors. Tourism officials, and other segments of the hospitality industry, demand reliable estimates of the number of out-of-region visitors that can be generated by casinos and how many visits and what type of spending will occur each year as a result of those visits.Thus, one purpose of gravity models has been to provide investors with an evaluation of specific sites for proposed business establishments and to determine the potential sales of the proposed establishments within a reasonable range of error, which allows investors to assess the probability that the proposed casino will be financially successful. …