Market structure and prices in online betting markets: theory and evidence

It is well known that odds offered by bookmakers display a favourite-longshot bias, such that bets on longshots lose more than bets. Explanations commonly focus on bettors having risk-loving preferences or failing to judge small probabilities correctly. We show that favourite-longshot bias can emerge from bookmaking markets being imperfectly competitive because when people disagree about the probabilities of the different possible outcomes of an event, demand for bets on longshots is less sensitive to the odds than bets on favourites. We compare odds on over 150,000 European soccer games from two different bookmaking markets that differ in their level of competition and report predictions consistent with our framework. In particular, the data confirm a distinctive prediction from our imperfect competition model about returns from betting on draws.