Royal Resort and Casino Case

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The scheme in the gambling industry is the same everywhere. The main goal is to attract the client first and to make his/her stay as pleasant as possible to spend as much money on the tables as they possibly can.

RCC operates as a single firm to maximize the combined net profit from its three divisions. In this case, the three divisions operating as a single firm outperform the three divisions operating as individual companies in the market.

There is a synergy between the divisions where the combined result is better than the sum of the individual performances. In fact we could say that Entertainment and Hotel give support to the main income generator that is Gambling.

As the beginning of chapter 4 of the book says Team Production is the key reason that firms exist. That means in this case that the profitability of the Hotel and the Entertainment division are somehow sacrificed, hence the negative EVAs, for the benefit of having more clients spending their money on gambling and consequently rising the collective output that is the joint benefit.

The other businesses operating separately have, presumably, a positive EVA but, as the case states, they serve a less affluent clientele and thus the combined EVA is probably smaller that RCC’s.
Following the example of the automobile in page 144, chapter 4 of the book, there is also the advantage for the consumer of having only one transaction cost. Firms emerge to economize on repetitive contracting and consumers seek to have bundles of services under one transaction.

The hotel will attract more clients by having entertainment opportunities and gambling possibilities at hand and the gamblers will more likely go to a place with entertainment and good food and lodging.

There is in effect a transfer price between the Hotel and Entertainment divisions and the Gambling division.
To reflect a good approximation of opportunity cost this transfer price could never be market based because of the large synergies...
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