Paper 3 question on
behavioural economics,
oligopoly and demerit goods
The growth of the gambling market
The online gambling industry was one of the fastest-growing markets in 2023 with an annual growth
of 4.1% and is projected to achieve a worldwide revenue of US$107.30bn by the end of 2024. This
growth is forecast to continue with the number of online gamblers reaching 243.2m users by 2028.
Gambling companies such as Betsson AB, 888 Holdings, The Stars Group and Bet365 have seen rapid
growth in their revenues over the last three years and the overall profitability of the sector
is growing in a similar way.
In Country X the total revenue of the
5 largest gambling companies is $62m
which accounts for 83% of total
market revenue. Some economists
believe the market power of these
firms means there is a loss of
community surplus in the market.
Diagram 1 shows the cost and
revenue data for Firm Y in Country X.
The marginal revenue of Firm Y at the
profit-maximising output is $16 and
the average cost is $26.50.
Questions
a. (i) State the market structure that most accurately reflects the gambling market in country X. [1]
(iii) State the marginal cost of Firm Y at the profit-maximising output. [1]
(iv) Calculate the welfare loss associated with Firm Y in the gambling market in Country X. [2]
(v) Calculate the profit Firm Y is making. [2]
(vi) State the type of profit Firm Y is earning. [1]
© Alex Smith
InThinking www.thinkib.net/Economics 1
There are several behavioural economics ideas associated with online gambling. People often
gamble more online because betting on the internet often does not feel real in the same way as
using cash at a sporting event or in a casino. Betting websites are also set out in a way that makes
them very attractive to potential gamblers (choice architecture). Many of the betting options offered
to customers have complex odds which people find difficult to understand so they struggle to make
rational decisions (bounded rationality). Gamblers often ‘chase losses’ when they are losing
(bounded self-control) and offers such as ‘free bets’ can attract consumers (framing bias).
(viii) Outline how ‘free bets’ are an example of framing bias. [2]
(ix) Explain how bounded rationality and bounded self-control might lead to users gambling too
much money. [4]
(x) Using a demand and supply diagram, explain how betting companies can use choice architecture
on their websites to increase the demand for their product. [4]
Many economists and politicians see gambling as a demerit good because it is associated with
significant social costs. For example, mental health issues, financial problems and family breakdown
are some of the consumption external costs associated with problem gambling.
An economic study of Country X had the following data about the country’s gambling market. At the
socially efficient output of 530,000 users, the marginal social cost is $25 and the marginal social
benefit is $17. The equilibrium market output is 700,000 users
(x) Calculate the value of the negative consumption externality. [1]
(xi) Calculate the welfare loss of the gambling market in Country X. [2]
b. Using the text/data provided and your knowledge of economics, recommend a policy that may be
implemented to reduce the market failure associated with the gambling industry. [10]
© Alex Smith
InThinking www.thinkib.net/Economics 2
