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Betting Against Monopoly:The FTC’s Review of the Penn National Gaming-Argosy Merger
V
OLUNTARY
T
RADE
R
EPORTS
N
O
. 7  J
ANUARY
2006Introduction
On November 3, 2004, Penn National Gaming Inc. (PNG) signed a contract to acquireArgosy Gaming Company. At the time of the agreement, Argosy operated six casinos in theUnited States that generated a net income of $1.04 billion in 2004.
1
PNG, headquartered inPennsylvania, owned eight casinos in the U.S. and Canada, along with several race tracks andoff-track betting facilities with a 2004 net income of $1.14 billion. The combination of PNGand Argosy created the third-largest gaming company in the United States.
2
PNG and Argosy each owned a riverboat casino in Baton Rouge, Louisiana. TheArgosyCasino of Baton Rogue is located less than two miles from the PNG-operated Casino Rogue.They are the only two full-service casinos licensed by the State of Louisiana to operate in EastBaton Rogue Parish, a county with an estimated population of 412,000.
3
The U.S. Federal Trade Commission filed an administrative complaint on July 26, 2005,alleging that PNG’s proposed ownership of both Baton Rouge casinos would “tend to create amonopoly” and the result “may be substantially to lessen competition” for casino services
1 Argosy Gaming Co., Annual Report (Form 10-K) (March 15, 2005),
available at
http://www.sec.gov/Archives/edgar/data/895385/000110465905011184/a05-1796_110k.htm.2 Penn National Gaming, Inc., Annual Report (Form 10-K) (March 30, 2005),
available at
http://www.sec.gov/Archives/edgar/data/921738/000104746905008328/a2153647z10-k.htm.3 2004 Census Bureau estimate. This figure is probably higher today due to population displacement fromHurricane Katrina.
Voluntary Trade Reports ( 
ISSN applied for), number 7, is published twice per month by Citizens for VoluntaryTrade d/b/a The Voluntary Trade Council, Post Office Box 100073, Arlington, VA 22210. S.M. Oliva, editor;Linda McGreevy, assistant editor.
©2006 by The Voluntary Trade Council. All rights reserved. This publication may be freely copied anddistributed, with attribution to the Voluntary Trade Council as author, for non-commercial purposes. Forcommercial reprint permission, contact the Voluntary Trade Council at (703) 740-8309 orinfo@voluntarytrade.org. Visit the Voluntary Trade Council’s website at www.voluntarytrade.org.
 
Voluntary Trade Reports No. 7 
within Baton Rouge.
4
The FTC said this violated Section 7 of the Clayton Act, 15 U.S.C.§18, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. §45. The complaint saidthat the merger would lead to a decrease in the quality of both Baton Rogues casinos and
a possible increase in prices that would harm the citizens of Baton Rouge and other casinopatrons.In order to preserve the larger merger, which was completed on October 3, 2005, PNGagreed to sell the Argosy Casino of Baton Rogue to a buyer approved by the FTC,Columbia Sussex Corporation, for $150 million. The Commission issued a formaldivestiture order on October 27, 2005, following Louisiana regulatory approval of thetransfer of Argosys Baton Rogue gaming license to Columbia Sussex onAugust 16.
Illinoisstate regulators separately forced PNG to sell two Argosy casinos in that state, which mustbe completed by December 31, 2006. The FTC did not participate in the Illinois action.This report will provide an “after action” analysis of the FTCs intervention in the
PNG-Argosy merger, paying particular attention to the Commissions jurisdictional and
economic claims.
Louisiana’s Gambling Industry
There is no free market for gambling in Louisiana and most other places within theUnited States. Instead, gambling is generally prohibited except by license from the state,under the direct supervision of a state gaming regulator. Louisiana law creates fourcategories of authorized gambling: video poker, riverboat casinos, racetrack-based slotmachines, and land-based casinos. The Louisiana Gaming Control Board (LGCB) licensesand regulates all four categories.In the PNG-Argosy merger, the FTC focused solely on riverboat casinos, specificallythe two casinos located within East Baton Rouge Parish. There are, however, 15 licensedriverboat casinos within the State of Louisiana and a single land-based casino.
5
Of the 14casinos excluded from the Commissions market definition,
eight are located withinapproximately 125 miles of Baton Rouge, about two hours driving distance. The remaining
4 Complaint at 3, In the Matter of Penn National Gaming, Inc., Docket No. C-4143 (July 26, 2005),
availableat
http://www.ftc.gov/os/caselist/0510029/050727comp0510029.pdf.5 Hurricane Katrina forced the closure of three riverboat casinos and the land-based casino, all locatedwithin Orleans Parish. Because the Federal Trade Commission completed its review of the PNG-Argosymerger before the hurricane, however, this report will rely on pre-Katrina information in discussing themarketplace.
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Voluntary Trade Reports No. 7 
six are located in and around Shreveport, approximately 210 miles from Baton Rouge, orabout four hours driving distance.In addition to the land and riverboat casinos, there are three racetracks with slotmachines and three casinos run by Indian tribes, all but one within 125 miles of BatonRogue. And then there is video poker. As of November 2004, the LCGB had licensed 2,476locations to operate a total of 14,352 video poker machines. These locations included bars,restaurants, hotels, off-track betting parlors, and truck stops.In reviewing the PNG-Argosy merger, the FTC defined the relevant market as “casinoservices,” which included only those facilities that combine “slot machine, video pokermachine, and table gaming services, and associated amenities such as parking, food andbeverages, and entertainment.”
6
This definition excluded racetracks and video pokeroutlets. The Commission also noted that Louisiana limits riverboat casinos to 30,000square feet of floor space, and consequently all casinos have similar numbers of gamingmachines and tables.
7
State law also mandates maximum and minimum “pay back” ratesfor gaming maachines. Individual casinos still compete on other gaming terms, such asminimum and maximum bets per play, and the FTC described this competition as “highlylocalized.”
8
And while the FTC objected to PNG owning both riverboat casinos in East BatonRogue Parish, such localized concentration is not without precedent in Louisiana.
All InterstateCommerce is Local
Congress created the FTC under its constitutional authority to “regulate commerce . . .among the several states.”
9
The Commissions mandate to identify and prohibit “unfair
methods of competition” exists within this context of regulating interstate commerce.Thus, while the overall merger of PNG and Argosy created a multi-state casinoconglomerate, there is a threshold question of whether the Commissions decision to
challenge a specific combination of two casinos in the same state—indeed, the
same city
—constituted interstate commerce that can be subjected to federal regulation.
6 Compl., para. 7.7 Analysis of Agreement Containing Consent Orders to Aid Public Comment at 2, Docket No. C-4143 (July26, 2005),
available at
http://www.ftc.gov/os/caselist/0510029/050727anal0510029.pdf.
8 Id
.9 U.S. C
ONST
., art. I, sec. 8.
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