Why there will never be a rake war (longwinded)

[Greg J]

There have been many posters constantly discuss how market forces will force rake down. The logic is simple, and based on the idea that fair and open competition will lead to a lowering of prices. It’s a common assumption in economics, and it is really a logical conclusion. A lot of posters I highly respect have this view. But I think they are dead wrong. In fact, I think that we can expect to see the trend of higher rake that we see on sites like Pokeroom and Pacific to continue. There are a few dynamics here that lead me to this conclusion, and they violate the assumptions of the standard argument that competition leads to lower prices.

1) The “consumer,” in this case the poker player, is very ignorant. This does not mean you, faithful 2+2 poster, but the average customer. Interesting anecdote: every time I talk to my brother-in-law about poker, I have to re-explain what rake is! The recreational player does not think about rake like the thinking serious player does. He/she does not consider the effect it has on winning or losing. I think many of you would be surprised to learn that some people don’t even know what rake is! Most that do have no clue of the implications. “Oh that’s only 2 dollars out of a $50 pot. No big deal at all!” When rake is increased, most players don’t notice.

2) It is not in the interests of the sites to inform the customer about rake in order to get their business. Internet poker is seen as “iffy” by many American players already. If they start making rake salient, then they will probably be less likely to deposit anywhere. No poker site is likely to get business on the argument “our rake is lower!” except of course from poker geeks like us. (And no offense guys, but I don’t want you at my table!)

3) The players that do notice a rake hike who will be less likely to play the site are typically better than average players. This is not critically important, but it does factor in, and makes raising the rake that much more profitable. A winning player is less prone to making multiple deposits. The recreational players (“fish”) are more prone to pass money around between each other, ultimately making it a –EV game for everyone (assuming no sharks) since over time, the house takes enough of a cut to make them all losers. You see, the sites understand that raising the rake will make some players leave, but these are not the most profitable customers. Even the high volume players who play rake are good but suboptimal customers. They pay lots of rake, but they also remove a lot of money from the system that would otherwise go back to the house in the form of recreational players passing it around in the form of raked pots. If they loose these high volume sharks, it’s not the end of the world.

This logic has an interesting implication: there are going to be several high rake sites with relatively soft games, and some low rake sites where the better more informed poker players will go. Pacific is known as having both the highest rake and the worst players. I think over time Pokeroom will start to get softer and softer because of this dynamic (especially if they start offering fewer bonuses). In the meantime, we will either be breaking ranks and paying higher rake to play where the less serious recreational gambling poker player is, or we will be TAGing it up against each other eeking out meager winrates and worshiping our rakeback deals (and that is the best of us!).


However, I don’t expect this to be a stable equilibrium, it’s just something we will be likely to see in the relative short term. Eventually, I think it will be in the interests of all poker sites to steadily increase rake. That’s right, rake will keep getting higher and higher everywhere.

A lot of poster I like and respect repeatedly come to the opposite conclusions, that eventually good old economics will kick in and the sites will have a rake war. I’m sorry, but as much as I would like for this to happen, I don’t see it occurring. The conclusions of lower prices resulting from competition as based on certain assumptions about the consumer as being highly informed and an optimal decision maker. Neither is the case here. There will be no rake war. Instead there will be a near universal raising of the rake.

Of course, I could have made a mistake somewhere in this post, and am welcome to criticism regarding this argument and its conclusion. There is nothing I would like more than to be proven wrong here!

[jwvdcw]

I agree with a lot of what you say, especially point #1. And I agree that a low rake war is not likely to happen.

However, I'm not sure I agree with point #3. The good players are the best consumers for the poker sites because they play the most. Just because they take money from the bad player and the bad players stop playing, doesn't matter. Even if there were only poor players at a site, you would still have differnet categories, only then it would be "average", "bad", and "terrible" instead of "good", "average", "bad", and "terrible." In short, I think that players would still go broke and stop playing- the only difference being that luck would be more prevalent in who goes broke.

[ QUOTE ]
There have been many posters constantly discuss how market forces will force rake down. The logic is simple, and based on the idea that fair and open competition will lead to a lowering of prices. It’s a common assumption in economics, and it is really a logical conclusion. A lot of posters I highly respect have this view. But I think they are dead wrong.

[/ QUOTE ]

Here's an example from another market of why you may be right. In the US real estate market, realtors charge in the neighborhood of 6% of the value of a home to sell it. In the Seattle area, the average home is now going for $400,000.

This means it costs $24,000 to sell your house in Seattle. This is totally insane, real estate agencies don't need to charge anywhere near this amount, they'd be profitable charging a third of this or less.

It's not an unbreakable law that market forces drive prices down, it's merely a tendency.

[Greg J]

Thanks for the comments. With point three I'm really trying to argue that it's better for the poker site to have the weaker players loose to other poor players and the house than to winning players who make many more cashouts than they do deposits.

You are right that there are degrees to how poor a player is. That was a (over?)simplification I made to illustrate my point. However, you certainly agree that money goes into a site primarily from deposits from mostly losing players. If the better players leave, then they just lose the money slower (as a whole -- certainly there will be expections). This means they play more hands, win more (raked) pots, and ultimately contribute more money to the site in the form instead of having it taken by a shark who cashes out to by a new fp2001. [img]/images/graemlins/grin.gif[/img]

That is, in short, why the sites perfer "fish" to sharks. The high volume of fish makes up for the high volume playing habits of sharks.

[rusty JEDI]

Maybe its time for teams of spammers to start spamming as obsververs about what site/sites have the lowest rakes.

rJ

[ QUOTE ]
With point three I'm really trying to argue that it's better for the poker site to have the weaker players loose to other poor players and the house than to winning players who make many more cashouts than they do deposits.

[/ QUOTE ]

I don't see the logic behind this. What difference does it make whether or not people make cash outs? Regardless of the deposit/withdrawal frequency, you, me, bad players, good players, pay rake.

It seems that you may not understand what the pros and cons are for different types of players at cardrooms. You may want to consult Mason's Poker Essays where he talks about this. But basically, winning players help maintain games so that bad players can play. Good players tend to play more often at rooms with worse players. When the balance tips, good players will start to leave for greener pastures.

A cardroom needs a good mix of types of players as well as the luck vs. skill ratio in particular games for a room to be successful.

FWIW, I do agree with you about the rake war. I don't really see that happening, but I do think that rooms will offer reduced rake options and other methods to get players to play. A room can start to grow with a base of decent, consistent players and then eventually attract bad players to keep the good players, etc., etc.

I do think that economics apply to poker rooms. If the rake is too high, no incentives, etc., good players will leave for better opportunities. Good players do, after all, tend pay more rake as they tend to play more.

[Greg J]

[ QUOTE ]
I don't see the logic behind this. What difference does it make whether or not people make cash outs? Regardless of the deposit/withdrawal frequency, you, me, bad players, good players, pay rake.

[/ QUOTE ]
Thanks for the comments.

This is true. I don't think I'm articulating my point well. The idea is the poker sites would rather have recreational players pass money around amongst themselves >>> they play more hands >>> they pay more rake. A winning player wins that money then cashes much of it out instead of losing it to other players and paying rake.

The winning player does not pay less rake, you are right. But he/she prevents other (losing) players from paying MORE rake. Does that make sense?

As for Mason, he has forgotten more about gambling than I probably will ever know. (I would love to hear his comments on this topic!) I have never read that essay you are refering to, and perhaps that does change the dynamic of my argument somewhat.

[Matt Flynn]

Most customers are indifferent to rake.

[ QUOTE ]

This is true. I don't think I'm articulating my point well. The idea is the poker sites would rather have recreational players pass money around amongst themselves >>> they play more hands >>> they pay more rake. A winning player wins that money then cashes much of it out instead of losing it to other players and paying rake.

The winning player does not pay less rake, you are right. But he/she prevents other (losing) players from paying MORE rake. Does that make sense?

As for Mason, he has forgotten more about gambling than I probably will ever know. (I would love to hear his comments on this topic!) I have never read that essay you are refering to, and perhaps that does change the dynamic of my argument somewhat.

[/ QUOTE ]

Yeah, I understand your point now. I'll have to think about this. I'm not sure if this is true either.

But I do believe that a poker room would rather have a player's longterm play and contribute to the rake for an extended time. Bad players will often play, lose whatever their point of pain is (unless they are degenerates [img]/images/graemlins/smile.gif[/img]), and not play anymore. Perhaps that what bonus reloads are intend to do--keep bad players playing.

Rooms will probably get away with higher rakes as most people have no idea what the rake is or means. Either way, there will always be sites with reduced rake as a competitive measure. New sites esp. have reason to do this.

[SomethingClever]

I agree that most customers being ignorant of the rake factor is critical, but even a soft, soft game will eventually become unbeatable due to the high rake, and at that pointm even the TAGs won't play there.

And the fish will start noticing at a certain point.

Also, one thing you're ignoring is the possibilty of online poker becoming legal in the US, at which point the competition will get INSANE. Maybe it won't lead to a "rake war" per se, but it could lead to some sweet "bonus wars," which would have about the same effect.