Business cycles of casino cities: Theoretical model, empirical evidence and policy implications

ABSTRACT

Applying a Markov switching model (MSM) to Las Vegas and Macao, this paper decomposes their business cycles of the casino hospitality industry into high and low growth states (HGS, LGS). Compared with Las Vegas, casino gaming in Macao is more volatile due to larger ups and downs in tourism flows, with HGS being far higher and LGS being much lower. Gaming hospitality in both travel destinations has a strong tendency to stay in HGS, but a low chance of recovering from LGS. While the two cities’ hospitality cycles are desirably asymmetric, Las Vegas’s cycle seems more favorable than Macao’s. Furthermore, in this paper, MSM is incorporated into a structural regression to identify determinants of hospitality cycles and generate policy implications useful for decision-making. It is observed that local hospitality cycles are affected by external business cycles and other demand- or supply-side factors. It is necessary for Las Vegas to strengthen promotional marketing and for Macao to pursue industrial diversification.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Rather than appearing as a result of a direct contact with casinos, high rollers are usually marketed to and invited by junket operators who hold “dead chips” (junket chips) sold or provided by casinos. This unique operating system called “VIP room contractual system” plays a significant role in Macao’s gaming industry by constructing personal relationships and assuring confidentiality. The relevant studies are those by (Lam, 2007) and (Kim, 2010).

2. The total cost of out-of-area marketing by Macao resort casinos includes (i) general expenditures on promotion and publicity to attract all types of tourists and (ii) special expenses on commissions, rebates and other items aimed at attracting VIP customers. The total such cost, albeit rising rapidly, also is a very effective way of bringing in mass-market visitors and high rollers. Gu and Tam (2014, pp. 140–141) describe marketing costs specific to Macao, but the study is also applicable to Las Vegas.

3. South China’s Greater Bay Area, also referred to as Guangdong-Hong Kong-Macau Greater Bay Area, consists of nine Chinese mainland cities from the Pearl River Delta and two special administration regions (Hong Kong and Macao). This concept was proposed in 2015, aiming to construct a world-class city region by strengthening intercity synergy. Macao, as one of the four core cities, has been designated a “World center of tourism and leisure” as well as a “Commerce and trade cooperation service platform between China and Lusophone countries.” Macao can benefit from the spillover effects of economic agglomeration by deeper integration in the development of the Greater Bay Area.

Additional information

Funding

This research has been funded by the University of Macau Senate Research Committee [MYRG2018-00032-FSS].

Notes on contributors

Li Sheng

Li Sheng received his PhD from the University of Freiburg, Germany. He is currently a professor of the Faculty of Social Sciences, University of Macau. His research focuses mainly on urban and international political economy.

Xinhua Gu

Xinhua Gu received his PhD from the University of Toronto. He is currently an associate professor of the Faculty of Business Administration, University of Macau. His research focuses mainly on business economics and finance.

Haizhen Guo

Haizhen Guo received her PhD from the University of Macau. She is currently an assistant professor of the College of Economics and Trade, Guangdong University of Technology. Her research focuses mainly on financial economics.