Posted by: Josh Lehner | November 26, 2012

Powerball

Powerball jackpot is currently at record levels for the game – an estimated $425 million for the drawing on Wednesday. The following takes a look at Powerball sales in Oregon and jackpot games more generally. A similar entry was posted back in March when Mega Millions reached its record jackpot. For jackpot games, sales closely follow the jackpot level. The graph below shows Powerball sales in Oregon on a weekly basis in recent years with the weekly average jackpot on the right axis.

There are a few interesting facts regarding Powerball in Oregon. While the game has been in place for more than 15 years, there is relatively new competition in the marketplace for the big multi-state jackpots with Mega Millions being sold in Oregon beginning in March 2010. As seen in the graph below, the overall level of sales between these two games – after smoothing over individual jackpot cycles – has been fairly steady and consistent at approximately $1 million per week in sales, which is in-line with the level of sales prior to the introduction of Mega Millions. However the record Mega Millions jackpot earlier this year drove a massive increase in sales during that period, just as the current Powerball runup is driving an increase in sales today.

The other important aspect of Powerball changes is the fact that tickets now cost $2 instead of $1, effective in January 2012. Along with the price change, the beginning jackpot level has also been raised to $40 million from $20 million. These important changes have only been in place for less than a year and their full impact on player behavior and the level of jackpots is not known yet. One of the reasons for making the pricing changes was to offer customers different games at different price points. Mega Millions will cost $1 per ticket with jackpots beginning at $12 million while Powerball with cost $2 per ticket with jackpots at $40 million. One plausible outcome of these changes is that consumers will purchase fewer Powerball tickets than they did prior to the price change given that the price went up, however given that consumers tend to follow the jackpot cycles across games, when Powerball does have a runup it will be larger than before given the higher price point.

What we have seen for the Feb 2012 – Nov 2012 time period: Prices have increased 100% compared to a year ago, jackpots have averaged 47% larger than a year ago and sales have averaged 28% larger than a year ago. Some of these changes are obviously by design, however some of the increases may be random, given the nature of jackpot runups. Some of this may be due to competition such as the record Mega Millions jackpot earlier this year. It will be interesting to see how these impacts settle out over time as consumers become more accustomed to the price increase and various jackpots across games.

Now, what does our model predict for sales given the record jackpot? There are a few complicating factors to arrive at an estimate. Currently our Powerball model is based on sales since the introduction of Mega Millions, however we only have a simple control variable for the price change in the game. Using this model, based on the March 2010 – Nov 2012 period, the predicted level of sales is $4.5 million, however if the model is based on just the history since the game went to $2 per ticket, the prediction is $6.5 million. While these are the likely outcomes based on historical patterns of sales, the fact that the jackpot is now at its largest level in history – meaning we are off-model or out-of-sample here- the actual results may vary.

Finally, what happens if an Oregonian won the jackpot? According to the Powerball website, the cash option is worth $278 million. Assuming a very simple tax return and applying the top marginal tax rate in the state to this value results in approximately $27 million in income taxes due to the state. Furthermore, the Lottery gets to keep a portion of sales to account for expenses and also as an incentive by Powerball to sell the game in the state. After accounting for expenses, Lottery transfers about 34% of Powerball sales to the Lottery Fund to be used by the Legislature to fund economic development, the education stability fund, parks and natural resources, county fairs and the like. With an estimated $4.5 – $6.5 million in sales, the expected transfer to the Lottery Fund would be $1.5 – $2.2 million.

Since the state hasn’t seen a Powerball jackpot winner since 2007 and in accordance with the law of averages, our office thinks we’re due :)


Responses

  1. It doesn’t make sense to me to give that much money to only one person. If the powerball money of 500 million dollars was going to be spread out to 500 people, more people would be buying lottery tickets. Also, the 500 winners would be buying all kinds of things and boosting the economy. Someone needs to really give this idea some thought.


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