Thursday, February 14, 2008

Strip Club Economics

Looks like someone is moving in on my research:
Freakynomics: An economic analysis of a gentlemen's club
Richard Feynman, Pacman Jones and Dennis Rodman-all great men, all leaders in their respective fields. All frequent strip club patrons.

Coincidence? I think not.

Strip clubs are, as defined by noted social commentator Chris Rock, "a place for all the married men of America." As a demographic with a decent amount of discretionary income, these men are the driving economic force behind the $5 billion strip club industry. This capital is concentrated in relatively few hands: A mid-sized club can generate $15,000-$20,000 in revenue on a Saturday night, and a stripper with an absolute advantage can earn nearly $1,000 in a night.

But how are these lucrative businesses structured? How equitable is the distribution of wealth? What is the marginal utility of an additional hour on the pole? Economists were dying to know, and as my capstone experience I elected to conduct a microeconomic positive analysis of the strip club industry.

What I discovered was a startlingly efficient business model revolving around independent contractors-the strippers. In contrast to regular employees, strippers retain more control over hours worked, jobs accepted and the quality of their performance. Cinnamon, a dancer at a local gentlemen's club, gave me some hard data about strippers' tax requirements.

"As independent contractors we're required to fill out 1099-MISCs," she said. "The paperwork's a breeze and we can deduct any work-related expenses, like tear-away pants and 8-inch glass heels."

Because the clubs provide the stage area and any private rooms utilized, many require payment from strippers at the onset of the evening. The strippers, in turn, keep any and all tips. The initial direction of the cash flow sheds light on two elementary paradoxes evident in all strip clubs.

1) The ugly stripper paradox. The club has an incentive to get as many dancers on the stage as possible, as a part of their revenue is directly proportional to the number of strippers stripping. Naturally, there is a scarcity of attractive women, ergo, ugly strippers. However, while the invisible hand of the market economy fills attractive strippers' g-strings with singles, it tends to gently usher ugly strippers offstage. The remaining ugly strippers are a product of asymmetrical information. There is a finite time most men have at a strip club, so they might settle for a less attractive stripper if they don't know a more attractive one is just a few songs away.

2) The over-enthusiastic stripper paradox. We've all seen them-dedicated strippers who literally work their pants off for any dollar they can get. What's driving these women, in addition to professional pride, is the expense of working. If the stripper makes a $30 payment at the beginning of the night, then most of her first hour would be spent just getting back into the green.

Rational people respond to incentives, so having strippers start their shift with a deficit gives them strong encouragement to dance the night away. This effect is magnified for average-looking strippers, who don't garner as much in tips, and over-enthusiastic strippers tend to be average-looking.

Clubs also draw revenue from cover charges and the sale of complementary goods such as alcohol and cigars. Though the clubs' independent-contractor relationship with their strippers somewhat limits their legal liability, in most cases, clubs hire bouncers to maintain a positive working environment. Bouncers are paid at a flat, hourly rate, and in some cases the strippers are also required to tip them at the end of the shift.

Demand for strip clubs seems fairly inelastic, as moves by the states of Texas and Nevada to tax strip clubs (sometimes by 25-30 percent) have been met with little industry resistance (this also indicates that strip club tax rates are currently on the upward-sloping side of the Laffer curve). The customer's relative purchasing power also has little effect on strip club attendance-the wealthy visit just as often as the poor. However, price discrimination (usually having a weekday college or trucker night) is often utilized to increase market penetration and increase consumer surplus. Ultimately, though, strip clubs market luxury goods; holistically these facts suggest a kinked demand curve.

Although this article provides a solid introduction to the economic workings of the strip club industry, its length means it cannot begin to reflect all the conclusions I've made in my hours of (rather expensive) fieldwork, and by no means should it be taken as the 21st century's first definitive work on stripper economics.

Rather, this article was meant merely to arouse interest in the subject and provide a springboard for future studies. Important questions clearly remain: How slim is the profit margin of a club that opens at noon on a Monday? Would Washington University benefit from adopting the independent contractor business model? What are the effects of strip clubs on substitute goods such as meaningful relationships and pornography? If nothing else, it would probably do everyone good to consider the trade-offs of taking it off.


David said...

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Please let me know.



Soup Nazi said...

This is very interesting.. but like some of those wonderful dancers.. it's just a big tease! Is there a longer version of this article available somewhere? Can you recommend any other articles analyzing the industry? or any sources of data?

Richard Dirt said...

great article!

birdie08 said...

I would love to get more info on your research since I'm planning on opening a club. please contact me if you have time.

Mark said...

I think a strip club is probably in many cases a substitute good for dating. A lot of guys do a cost benefit analysis of dating and just decide it's not worth it but don't want to totally forgo any sexual contact with women. This is especially true of guys who only have a primarily sexual desire for women and don't really desire their nonsexual company. Dating would require these men to to put in effort pretending to have a romantic interest in women they don't actually have just to get them to have sex. Since prostitution is illegal, strip clubs offer an alternative to dating. Many women are against strip clubs and prostitution but if I were a female I'm not sure I would want some guy pretending to like me just to have sex with me. Apparently, though, many women are ok with that because they don't support the legalization of commercial sex. It probably has something to do with eliminating potential competition and therefore increasing the price women can charge men on the dating market in terms of how much time, money and effort men have to expend to get and keep a girlfriend.