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Abstract
As governments draw increasing revenues from the lottery industry, it has become academically important, as well as for policy purposes, to better understand the factors that can explain lottery purchase decisions. The traditional literature uses either the expected return of each lottery ticket (effective price approach) or the jackpot size (jackpot approach) to explain the variation in lottery demand. In this article, we examine these two factors by exploiting a unique lottery game set-up in lottery practice in China. This lottery game is similar to lotteries in other countries except that there is a cap policy on the grand prize, which limits the reward of each jackpot winner. We show that this complex cap policy actually causes both the lottery effective price and the jackpot size to remain almost fixed for the majority of the time while lottery demand significantly fluctuates. The lack of variation suggests that, in China's practice, neither the effective price nor the jackpot size can explain the observed variation in lottery sales. Instead, we find that the size of the lottery rollover fits well in explaining the variation in lottery demand.
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Acknowledgements
We are indebted to the editor of this journal and the three anonymous referees for helping us to substantially improve the paper. We would also like to thank Travis Ng, Li Tao, Sun Guangzhen and the seminar participants at the Fudan University, University of Hong Kong and the First Conference of the APCG (Asia Pacific Association for Gambling Studies), 2012 for comments and suggestions. All errors are our own.
Conflicts of interest
Funding sources: None.
Competing interests: No potential conflicts of interest were reported by the authors. Both authors declare that they have no relevant or material financial interests that relate to the research described in this paper.
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Notes
1. In 2011, the total government revenue in China was around $1.5 trillion RMB (China Annual Statistic Yearbook, 2011). The revenue from the lottery games in China was around three times that from the securities transaction stamp tax in 2011.
2. The nominal price for each lottery ticket is 2 RMB. In each draw, over 150 million lottery tickets are sold on average and the average lottery revenue is over 300 million RMB. The rules of the game are very similar to other renowned lottery games worldwide, such as Lotto Max in Canada or Powerball in the US. The jackpot requires the matching of 7 numbers out of 43 which are randomly drawn. The abbreviation used for the Bicolor Ball Lotto is SSQ, following the initials of its Chinese phonetic spelling. More details of the SSQ will be discussed in Section 2.
3. The size of China's lottery market is comparable with that of other major lottery markets. For instance, in fiscal year 2011, lottery sales in the US were $23.8 billion according to LaFleur's 2012 World Lottery Almanac (LaFleur, Citation2012).
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5. We thank one of the referees for this suggestion.
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Notes on contributors
Jia Yuan
Jia Yuan received his PhD in Economics in 2009 from the University of Minnesota. He is currently an assistant professor at the Faculty of Business Administration at the University of Macau. His research interests include empirical industrial organization, gambling study, and applied economics. He has published in the Journal of Gambling Studies, Journal of Gambling Business and Economics, etc.
Jason Z. Gao
Jason Z. Gao received his PhD in 1989 from University of California at San Diego. He is currently a full professor at the School of Mathematics and Statistics, Carleton University, Ottawa, Canada. His research focuses on discrete mathematics, mathematics of gambling, and game theory. He also does consulting work for the gambling industry and telecommunication industry.