Micro-Economics

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She doesn't know it, but Linda Maranees is the subject of a behavioral experiment that could change the odds of the gambling business. The Memphis, Tenn., retiree, her blouse bedecked with sequined cards and dice, has just received invitations to two nearby slot tournaments, along with vouchers for $200, all courtesy of Harrah's Entertainment Inc."Harrah's is savvy," says Ms. Maranees, who admits that once in the casino door, she is bound to spend much more than what Harrah's has given her. That is exactly what the Las Vegas-based company is banking on. Over the past two years, Harrah's has quietly conducted thousands of clinical-style trials to determine what gets people to gamble more. Based on its findings, Harrah's has developed closely guarded marketing strategies tailored individually to the millions of low-rollers who make up its bread-and-butter business.The results are impressive enough that other casino companies are copying some of Harrah's more discernible methods. At the center of Harrah's strategy is a former Harvard professor named Gary Loveman and a vast mathematical model much like the ones that airlines use to fill seats with the highest-paying fliers. But this one scores gamblers on how profitable they can be to Harrah's. Richard Mirman, the company senior vice president who refined the model, boasts that it is Harrah's "secret recipe" -- on a par with the famous unrevealed formula of Kentucky Fried Chicken. The model tells Harrah's marketers how to appeal to gamblers such as Ms. Maranees, based on data tracking their previous behavior in casinos. Spitting out "behavior modification reports," Harrah's computers suggest that Ms. Maranees -- an avid slot-tournament player -- will respond best to a cash offer, while Tina Montgomery, a real-estate agent from nearby Oxford, Miss., is better motivated by a free hotel room. As Ms. Montgomery gambles downstairs, she explains, "My husband stays in the room."
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How does this article relate to micro-economics? And how do the terms barriers to entry and price discrimination relate to the current success of Harrah's strategy and the prospects for continued success with the strategy.

  • Micro-Economics -

    A most excellent question. A question asking you to think like an economist. And the question just oozes with micro-economic issues.
    Take a shot, what do you think. I or others will be happy to critique your thinking.
    Hints. Think about what the casino is selling. Assume both Linda and Tina are utility maximizers. How does each of the casino comps affect the "price" of the casino experience? What must their utility function look like for the casino to make a profit from their comps? And, for continued success, think about declining marginal utility. That is, distinguish between short run and long run utility maximization subject to budget constraints.

    Lotsa luck.

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