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wouldn't it make more sense to just stake people that you knew instead? Or is the goal to try and get those people to come back and spend their own money to play? There's gotta be better ways to find players for your game.

Also, if there are other card rooms in town, how does it usually work? Do they get territorial, or what?

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They will spend their own money. Genreally you want to keep the main attractions at your games. If you have players that will routinely lose $1k at a 3-6 game it isn't a big deal to loan them another $1k and only get paid back half of it or so. One of the real skills in maintaining underground games is managing the credit correctly because you don't want to gove away so much that you go broke, but you want to keep the fish in action as much as possible. There were other games around, we generally had a more competivie rake structure, better dealers, and made credit avialable to keep players coming to our place.