Interdependence is the occasion for both cooperation and conflict.--Allan Schmid
If one would understand the corporation problem, he must learn the peculiar feature of this form of business, ...--Walton Hamilton
The evolution of an industry is a dynamic and cumulative process. It is dynamic because "competition, property, the price structure, and wage system, and like institutions refuse to retain a definite content. Not only are things happening to them, but changes are going on within them" (Hamilton 1919, 315). It is cumulative because in a human society, "the situation of today shapes the institutions of tomorrow through a selective, coercive process, by acting upon men's habitual view of things, and so altering or fortifying a point of view or a mental attitude handed down from the past" (Veblen 1959, 132-133). In any successive period, the changing structure and performance of an industry, and its interrelationship with the economy in which it evolves are the products of interactions of a set of interdependent social, economic, and political variables of the preceding periods (Schmid 1987).
To understand the insight of the evolution of an industry, an economy, and a society as a whole, institutionalism has played an important role in economic literature since the dawn of the twentieth century (Veblen 1899; W. Hamilton 1919; Ayres 1962; Bush 1987; Hodgson 1988; North 1990; D. Hamilton 2004). Extensive interests of the institutionalists have been devoted to studies of the evolution of industrialized economies in North America and Europe, institutions and institutional changes in the rest of the world, present valuable case studies to enhance our understanding about the evolution of various industries and their relationship to the performance of an economy. Among the emerging economies in Asia, the evolution of Macao's casino industry from monopoly to oligopoly provides a valuable case, which illustrates the dynamic and cumulative process of institutional change.
Before getting to the details of this study, it is worthwhile to first clarify some important concepts. Given the scope of the study, "institutions" are defined as "rules of the game in a society" (North 1990, 3), or "a set of socially prescribed patterns of correlated behavior" (Bush 1987, 1076), whereas "institutional change" refers to "changes in rules, in informal constraints, and in kinds and effectiveness of enforcement" (North 1990, 6), or "a change in the value structure" (Bush 1987, 1099). Because of the particular attributes associated with the practice of the service-based casino industry, the concept of efficiency primarily refers to transaction costs of economic activities in the discussion on the impact of institutions and institutional change to economic efficiency. Generally speaking, the heuristic nature of transaction costs is emphasized when analyzing the changing efficiency of the casino industry over time. The heuristic nature of transaction costs "means that the exact quantity cannot be determined, but their order of magnitude can be approximated, especially when different sums of transaction costs of different property rights regimes are compared with each other" (Buitelaar 2002, 17). In the context of a modernized casino industry like Las Vegas, for example, although the exact quantity of transaction costs associated with different levels of service quality could hardly be determined, as service quality improves, business turnover in terms of the volume of customer visits or customer spending per visit would generally increase, ceteris paribus. Consequently, it is reasonable to conclude that when service quality is improved, transaction costs to customers on average would decrease; hence more efficient is the industry.
Macao was established as a Special Administrative Region of China with its sovereignty officially returned to the Chinese Government from the Portuguese Government on December 20, 1999. It is composed of the Macao Peninsula, two islands (Taipa and Coloane) and a piece of reclaimed land (Cotai) between the two islands. With a tiny geographical area of 26.8 square kilometers, and a population of 460,000 in 2004, Macao catches the world's eye on the unique situation, structure and performance of its casino industry, as well as the recent change in the industrial structure of this industry. In 2004, the total gaming revenue recorded by Macao's casino industry hit a record of MOP40.187 billion (1) (or US$5.02 billion)--MOP (Pataca) is the domestic currency of Macao, 8 MOP is about the equivalent of $1.00 in the United States. This performance surpassed Atlantic City's US$4.8 billion (2) and placed Macao as the second largest casino jurisdiction in the world market, lagging only behind the Las Vegas Strip which reported a total gaming revenue of US$5.3 billion (3) in 2004.
On February 8, 2002, the Gaming Tender Commission of the Macao Special Administrative Regional (MSAR) Government officially announced three winners out of eighteen candidates bidding for new gaming licenses. The winners were Sociedade de Jogoes de Macau (SJM--a wholly-owned subsidiary of the former monopolist); Wynn Resorts from the United States; and, Galaxy JV (a joint venture of a Hong Kong firm, Galaxy, and the Venetian from the United States). As a result, the monopolistic structure of the industry, in existence for more than sixty years (4) formally terminated. This change not only excited the local community, but also turned the world's attention to the changing performance of this famous Asian gaming jurisdiction. In this study, the specific forces pushing this institutional change will be unveiled. One force includes the social costs accumulated from the poorly regulated private-VIP-room business since the middle of the 1980s. This is an informal arrangement between the gaming monopoly and the individual junket operators--also called contractors of the private VIP rooms--who agree to underwrite a certain amount of non-redeemable chips from the monopoly. They are allowed to organize their own gaming business on the properties--the "private VIP rooms"--of the monopoly and then share the total winnings from their business with the monopoly. The complex practice of this business is discussed separately in a later section. Another force includes the diminishing economic efficiency after decades' of control over the market by the monopoly, and a third force pushing institutional change is the ever rising public inclination towards reorganizing the rights of the gaming industry following Macao's handover to China.
Given the unique situation and economic role of the casino business in Macao, concluding its monopolistic structure and altering the existing institutions (both the formal rules and the customs) of its management, elevates the economy's overall performance. Throughout this process casino customers and operators, the local workforce employed by the casinos, and the public sector, are all winners. Nevertheless, while the community is fascinated by the magnificent profit likely to result from this change, and intoxicated with the foreseeable success of this industry, the interests of potential losers should never be overlooked. In practice, it is quite likely that the local small and medium enterprises (SMEs) in the non-gaming related sectors would be worse-off. Although local businesses such as retail and entertainment could enjoy short-term benefits from the growing market size of the casino industry, their long-term performance is exposed to various degrees of uncertainty. To sustain the performance of the casino industry, and secure its level of contribution to Macao's overall economy, improvement in the business environment for the casino operators and enhancement of the overall structure of the casino industry by pairing its development with tourism and recreation become necessary.
By revealing the peculiar attributes of the casino business in Macao--the internal and external forces which ultimately lead to the changing structure and performance of the industry, and the interdependence of the various parties whose interests are counted in these changes--this study typifies "a logical connection between alternative property rights and the performance results of who gets what." This is done by referring to the three components--situation, structure, and performance (SSP)--of Schmid's institutional-impact theory (1987, 39-41). On top of the SSP paradigm, which assumes that "for the period of the analysis, situation is inherent" while "rights structure is a matter of human choice," this study further reveals the dynamic interrelationship between situational variables and structural variables, and their influences over industrial performance. Evidence collected for this study indicates that attributes of situational variables would normally be reshaped by the market following a change in public choice on a set of structural variables. The changing attributes of situational variables after a certain period of time, on the other hand, may generate new forces that urge decision makers to revise the choice and composition of the structural variables. The interaction between the changes of situational variables and structural variables drives the changing performance of an industry, and it is this dynamic that demonstrates the interrelationship between "increasing returns to institutions" and "the path of institutional change" in a society (North 1990, 95-96). In addition, Clarence Ayres' view of "past-biding" characteristics of institutional change (1967, 30, 137), and Paul Bush's discussion of "ceremonial encapsulation" and "progressive institutional change" (1987, 1092-1095, 1101-1103) will also be illustrated in this study.
Impulses Behind the Changing Structure of the Casino Industry
To economists, the term monopoly usually relates to inefficiency. In the case of Macao, although the community had become accustomed to a...