- What is price elasticity of demand?
- Betting and airlines
What is Price Elasticity of Demand?
Price elasticity of demand quantifies how the consumption of a product fluctuates with price changes. Essentially, the more elastic the demand, the greater the variation in product consumption in response to price shifts.
For instance, in the case of a product like bread, which has elastic demand, a price hike leads to a significant reduction in purchase quantities. Conversely, for products with inelastic demand, such as petrol, a similar price increase results in a relatively minor decrease in consumption.
This concept might seem straightforward, but how does it relate to the betting industry?
Price Discrimination: Favourites, Longshots, and Airlines
The favourite-longshot bias is a well-known phenomenon in the gambling sector. It is observed that a disproportionate amount of a bookmaker’s margin favors the longshot.
This bias is partly attributed to casual gamblers who tend to back the longshot in any given race, irrespective of the price. In contrast, more price-conscious punters search for value bets, typically on the favourite.
This behavior can be explained through the lens of demand elasticity.
A similar customer segmentation strategy is employed in the airline industry, where companies aim to maximize revenue by tailoring ticket prices based on customer profiles.
Casual travellers, who exhibit high price sensitivity, might change their travel plans based on ticket prices. Hence, airline tickets for this group represent a highly elastic demand.
On the other hand, business travellers, who prioritize convenience and time savings over cost, display inelastic demand characteristics. Price changes are less likely to affect their booking patterns.
Airlines capitalize on these dynamics by offering lower prices for early bookings, catering to elastic demand customers. As the travel date nears and seats fill up, prices are ramped up, targeting business travellers with inelastic demand.
This strategy effectively segments the market into two distinct customer types.
Favourite-Longshot Bias and Betting Companies
Similar to airlines, betting companies may employ a dual-market approach.
Market A consists of value-seeking bettors analogous to airline's recreational travellers. These bettors are highly price-sensitive and will scout for the best available odds. If the odds are not attractive, they might opt out of betting.
Market B includes less price-sensitive recreational gamblers who place bets based on convenience, such as user-friendly betting platforms, regardless of the competitiveness of the odds.
In this scenario, bookmakers serve both markets, much like airlines. The less price-sensitive Market B may effectively subsidize the sharper, value-seeking Market A.
This model explains why favourite-longshot bias might arise if bookmakers adjust their pricing strategies similarly to how airlines manage ticket sales.
Unlimited Supply and Information Flows: Why Bookmakers Limit Customers
Unlike airlines, which have a finite number of seats, bookmakers can accept an unlimited number of bets as long as there is market demand.
However, most price-sensitive bettors only place bets when they anticipate a net gain, which could be detrimental to a bookmaker’s profit margins.
Although airlines might suffer losses on some price-sensitive passengers to fill seats, bookmakers face a different challenge. They might limit or restrict their most astute bettors to prevent losses.
7x7Bets, however, takes a different approach by not restricting these sharp bettors. For 7x7Bets, the insights gained from the wagers of these informed punters are valuable for setting more accurate betting lines.
This allows them to optimize their earnings from casual bettors while still attracting significant action from the savvy Market B.
Volatility: Why Would Sharp Bettors Prefer Short Odds?
The question remains: why do sharp bettors tend towards shorter odds rather than longshots?
One reason could be that the high volatility associated with longshots makes it difficult to measure betting success accurately. More frequent events provide a larger sample size, facilitating more reliable long-term profit calculations.
Furthermore, bookmakers are cautious with longshot pricing due to the high potential payouts involved. Hence, sharp bettors might gravitate towards favourites, steered by the bookmakers’ conservative odds setting.
Additionally, the thrill of potentially turning a small stake into a large win may appeal more to Market A bettors, who predominantly gamble for entertainment.
This rephrased article integrates local Indian English nuances and maintains the structure and data integrity as specified.
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