How the Poker Economy Works

Posted on Oct 09, 2010 by Gugel in General

A model of how the poker economy works

A model of how the poker economy works

Here’s my simplified model of how the poker economy works:

  • The bucket represents the poker room.
  • There are two holes on the bottom.  One hole is the rake and the other hole is withdrawals.
  • There’s also a faucet that brings new water into the bucket. That water represents new deposits.

The poker room needs to keep the water level in the bucket stable or rising.  A decreasing water level will eventually spell disaster.

Before we proceed, I want to point a few weaknesses of this model.

  1. The poker economy is actually LOCALIZED.  That means that $100NL could be a very healthy game, but $200NL could be on the verge of collapsing.
  2. This model doesn’t really factor in bankroll management.  A fish that deposits $10,000 and plays $5/$10 NL is one thing.  A fish that deposits $10,000 and plays $0.01/$0.02 is another.  Same kind of thing for withdrawals.  It’s one thing to withdraw your entire roll and stop playing poker, it’s another to be playing $50NL with a $10,000 roll and withdraw $1k.

Let’s consider some scenarios:

Scenario 1
The poker economy is booming. The water is flowing into the bucket faster than it’s leaking out of the holes. The right step for poker rooms is try to open up the rake hole.  They’re leaving money on the table if they don’t.  To open up the rake hole, they can increase the rake structure or they can try to attract players that play a TON of hands.  Back when poker was booming, the poker rooms did just that.  They started to let players play 16 tables at once, gave VIP rewards based on the number of hands played, etc. Many poker rooms probably understand we’re not in this phase anymore, but they’re not adjusting that well.

Scenario 2
The poker economy is declining. The water is flowing out of the bucket faster than it’s flowing out. The right step for poker rooms is to try to increase the flow of water OR decrease the flow of water out of the holes. You can increase the flow of water by marketing, deposit bonuses, etc.   You can decrease the water flowing out of the withdrawal hole by  VIP rewards and limiting withdrawals.  Why are poker rooms not encouraging a guy playing $5/$10 with a $10k bankroll to keep his bankroll on the site? You can also plug up the rake hole.  I know, raising or lowering “prices” is generally a crappy way to compete against other poker rooms.  But that’s NOT the point of lowering the rake.  You lower the rake to maintain the health of YOUR poker room.  It’s similar to what the U.S. Federal Reserve System does when it lowers the interest rate during a recession.

Scenario 3
The poker economy is stable. The water is flowing into the bucket as fast as it’s flowing out. Poker rooms can try to grow the economy the same way described in Scenario 2.

Now, it’s pretty obvious that Scenario 1 is great for poker players, Scenario 3 is OK, and Scenario 2 is disastrous. If I were to guess the state of the poker economy, I’d guess we were in Scenario 2.   So why don’t I see any incentives to limit withdrawals? Why don’t I see more deposit bonuses? Why are poker rooms not lowering rake?  Are poker rooms too focused on new customer acquisition when they can take easy, immediate steps to better the poker economy?

Additional Recommended Reading: Underlying Flaws of the Affiliate Rakeback Model

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4 Responses to “How the Poker Economy Works”

  1. poker

    18. Oct, 2010

    The bucket never gets empty no matter how many holes are in it :) Great post by the way ! :)

  2. Ka kei Ho

    21. Oct, 2010

    @Scenario 2: Limiting withdrawals is probably going to hurt a lot more if any…

    For argument sake let’s assume that this is the case and this is what’s happening. I think poker rooms would do much better if they somehow pushed the US Government to make Online poker fully legal. Other than that I think most variables are out of control and is probably cheaper to push campaigns to make poker legal than to spend money doing advertisement, is one of those things that don’t seem related but I think in this case they’re tightly related.

    For what is worth is likely that we’re on some sort of scenario 3, as you describe it. That’s why there are not incentives as you mention, for what is worth I am not sure what makes you think that incentives to limit withdrawals is a good thing for the overall economy of the poker world, imagine banks in the real world started to do that, lots of banks would lose credibility and a lot of people wouldn’t put their money in the bank in the first place because who wants to have money stuck…

  3. Gugel

    21. Oct, 2010

    @Ka kei Ho

    I agree, preventing withdrawals would definitely be a bad thing. But I’m suggesting incentivizing players to keep their bankrolls on the site. For example, maybe they qualify for a freeroll or they get extra bonus for keep $x on there.

  4. Ka kei Ho

    22. Oct, 2010

    I see, I am not very aware of other poker room besides stars, but I guess what you are saying is having more deposit bonus and stuff like that, which I think happens with a decent frequency but probably not that high.

    I agree that deposit bonus are always good and possibly the best way to stimulate the poker economy.

    Either people will grind their bonuses or go busto if they go busto they will have a pretty good incentive to deposit again and if they go busto again that could be a good circle for the economy…