Elasticity of Demand and Optimal Prize Distribution for Instant Lottery Games

Better State Lotteries

“…One possible reason why states might discriminate in this way is classical price discrimination, in which revenues are increased by charging higher prices to customers with the most inelastic demand. However, Coon and Whieldon (2016) find that the least elastic demand applies to those who buy the highest-priced tickets, not the lowest-priced ones, so that possible justification for this discrimination would seem to have little basis.…”

“…Some, perhaps most, state lotteries offer the highest payout rates for their highest-priced games. Coon and Whieldon (2016, Table 1, 461) report this relationship for instant games in Maryland, where average payout rates ranged from 59.2 percent for games priced at $1 to 77.6 percent for games priced at $20. 26 To find out if this pattern applies to other states, payout rates were calculated for dozens of the most recent games in five other states as of March and April, 2023—California, Florida, Minnesota, North Carolina, and Texas.…”

“…Unrealistic in practice, a zero price is comparable to the notion of actuarially "fair" insurance, which also assumes zero administrative costs and zero profits. This definition is similar to but distinct from the "effective price" measure used by Coon and Whieldon (2016), defined as 1 minus the payout rate. 3.…”

“…In fact, the belief that raising payout rates would boost instant game sales later found statistical support in a study published in 2016. In their empirical analysis of instant game sales in Maryland, Coon and Whieldon (2016) estimated the elasticity of sales with respect to the “effective price,” defined as 1 minus the payout rate. Their estimates of the price elasticity ranged from −1.2 for games whose tickets were priced at $20 to a very hefty −6.4 for games selling for $1.…”