Industry dynamics and the value of variety in nightlife: evidence from Chicago

Author: Jacob Cosman

Study link: https://www.cemfi.es/ftp/pdf/papers/Seminar/cosman.pdf

Access to high-quality local services constitutes an important amenity in residents’ valuation of cities. This study examines consumer preferences for variety in nightlife to understand these preferences and their impact on nightlife industry dynamics. I develop a continuous-time structural dynamic model that parameterizes consumer preferences and describes venue entry and exit in the nightlife industry. In this model, consumers prefer access to variety in nearby venues and consume nightlife more often when the potential consumption utility increases. I estimate the model using a panel of liquor license data from Chicago. I find strong preferences for variety, both between and within different types of venues. The preference for variety (and the attendant increase in demand as variety increases) is sufficiently strong that on the median the increase in demand largely offsets the impact of additional competition on profit for incumbent venues. In particular, a new entrant without music, dance, or other amusement amenities raises consumer welfare as much as a 13.5% price reduction and lowers profits for other venues of the same type by less than 3%. However, potential entrants face high barriers to entry equivalent to six or seven years’ revenue.

Category: Economy