Fantasy Sports Rent-Seeking Distorts Markets and Harms Consumers

The March Madness tournament has placed sports in the forefront of many people’s minds, and with that comes online betting and fantasy leagues. DraftKings Inc. and FanDuel Group, the two largest online fantasy sports companies, have arguably engaged in rent-seeking in an industry that has become highly profitable.

In economics, rent-seeking describes activities intended to protect one’s market position by influencing government officials rather than creating additional value through superior products, innovation, or business acumen.

Because rent-seeking circumvents the natural competitive process, it harms consumers and innovation while enriching incumbent firms by, inter alia, raising barriers to entry. Further, rent-seeking by a coalition of competitors can run afoul of existing antitrust laws, which seek to prevent harmful conduct such as industry price-fixing.

DraftKings and FanDuel’s connection to rent-seeking is through their Sports Betting Alliance, which includes fellow incumbents BetMGM and Fanatics Sportsbooks. The SBA petitions state officials responsible for regulating gambling and fantasy sports to classify products offered by innovative rivals, such as Underdog Fantasy and PrizePicks, as games of chance rather than games of skill.

This distinction matters because fantasy sports, which are considered games of skill, aren’t as heavily regulated as games of chance—that is, gambling. The SBA’s aggressive efforts have even caught the attention of the Maryland State Board of Elections, which slapped the SBA with the largest fine ever assessed for failing to disclose a significant campaign contribution.

When DraftKings and FanDuel burst onto the market over a decade ago, some states initially banned their daily fantasy sports, or DFS, products under the rationale that they qualify as gambling.

The two companies successfully convinced federal and state officials that DFS is a different type of product and should be exempt from the regulations that typically govern gambling, because participants need extensive knowledge of the sports industry—not luck—to do well. The industry has now grown into billions of dollars of commerce.

As with virtually all markets, innovation happens. Upstarts have developed various differentiated products that have proven immensely popular with consumers, including pick ’em DFS, where participants make a list of predictions and payoffs are based on the performance of each prediction relative to a set benchmark—for example, will Josh Allen of the Buffalo Bills throw more than one touchdown?

Within this context, DraftKings and FanDuel have lobbied state officials to classify games such as pick ’em DFS as gambling.

Legal Line

The line between chance and skill can be debated—it is a states’ rights issue and more of a continuum than an absolute classification. That is why the two entrenched companies are advocating that regulators use the power of the state to erect artificial barriers to entry that hinder the ability of their rivals to compete.

These companies know that most of the states in the country have followed the parameters set forth in Congress’ Unlawful Internet Gambling Enforcement Act to classify most sports games that require predictions of more than one player as a fantasy contest rather than a gambling contest. That said, they also know that an aggressive lobbying campaign can change that.

There is nothing fundamentally wrong with advocating your position and sharing your perspective on an issue with state officials. But we also shouldn’t be so naive.

Nobel Prize-winning economist George Stigler pioneered the insight that incumbents often demand regulation because the burden of regulations can harm upstart rivals significantly more than incumbents that are better-positioned to weather and navigate regulatory costs and hurdles.

Double Standards

What about the argument that DraftKings and FanDuel believe games such as pick’ em harm consumers while their traditional DFS products are beneficial? The credibility of this argument is disproven by the fact that both DraftKings and FanDuel offer games of chance such as online casino and betting on a line in various states.

In the end, just as in other dynamic markets, online fantasy sports involve innovation, product differentiation, and skill. While gambling in the various states has always been heavily regulated, lobbying by incumbents to classify competitor products as prohibited, while offering similar products in other jurisdictions seems like a textbook example of harmful rent-seeking.

Incumbent companies shouldn’t be able to wield an outsize influence on regulations for sports prediction contests—whether they involve putting hours of research into a fantasy football team or filling out a tournament bracket based on one’s favorite college mascots.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John M. Yun is associate professor of law at Antonin Scalia Law School at George Mason University and previous acting deputy assistant director in the Bureau of Economics at the Federal Trade Commission.

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