The prominence of sports events such as March Madness has increased the popularity of online betting and fantasy leagues. Online fantasy sports giants, DraftKings Inc. and FanDuel Group, have been criticized for alleged rent-seeking behaviour in this highly profitable industry.
In economic terms, rent-seeking refers to efforts aimed at safeguarding a company’s market position by influencing government officials rather than adding value through superior products, innovation, or business acumen. This act bypasses the natural competitive processes which could result in harm to consumers and innovation, while benefitting incumbent firms by increasing barriers to entry.
DraftKings and FanDuel are reportedly connected to rent-seeking through their Sports Betting Alliance, a lobby group that also includes BetMGM and Fanatics Sportsbooks. This alliance appeals to state authorities in charge of regulating gambling and fantasy sports, with the aim to categorize the offerings of their innovative competitors, such as Underdog Fantasy and PrizePicks, as games of chance and not games of skill.
This distinction between games of chance and games of skill is crucial as fantasy sports, categorized as games of skill, do not face the same level of regulation as games of chance—i.e., gambling. This aggressive lobbying has drawn the attention of the Maryland State Board of Elections which has imposed its largest-ever fine on the SBA for failure to disclose a substantial campaign contribution.
Both companies, after launching their daily fantasy sports (DFS) products more than a decade ago, were able to convince federal and state officials that DFS is distinct from traditional gambling products, arguing that participants require detailed sports industry knowledge—not luck—to be successful. The industry has since grown into a multi-billion-dollar market.
Despite this success, DraftKings and FanDuel have urged state authorities to categorize games such as pick ’em DFS as gambling. This action, paired with the potential implications of Congress’s Unlawful Internet Gambling Enforcement Act, suggests that incumbent firms may wield optional influence on regulations for sports prediction contests. The argument put forth by DraftKings and FanDuel—that games such as pick ’em are harmful to consumers while their traditional DFS products are beneficial—lacks credibility given that both companies offer games of chance in several states.
In conclusion, like all markets, online fantasy sports encompass innovation, product distinction, and skill. While gambling has always seen significant regulation in various states, the actions of incumbents to classify competitor products as prohibited, especially while offering similar products in other jurisdictions, appears to be a prime example of damaging rent-seeking.
This is a summary of an article written by John M. Yun who is an Associate Professor of Law at Antonin Scalia Law School at George Mason University.