Matt has an interesting post today on the economy of Las Vegas:

This reminds me of a conversation I had with a friend last week about how Las Vegas investments seem extraordinarily exposed to policy risk. What happens if casinos become much more widely legal than they are today? And not just in out-of-the-way Indian reservations, but in major cities? After all, Vegas became Vegas precisely because that’s not a good location for a city so getting into the sin trade seemed like a good way to build it up. But that comparative advantage could be taken away at any time. With California’s budget in shambles, someone in the legislature must be thinking that legalizing and taxing casinos would bring in money.

This raises a good question — how vulnerable is Las Vegas to copycats? If casino gambling were suddenly legal in Los Angeles, would Vegas be toast?

Possibly, but the answer is not as clear cut as you might think. Vegas is more than just a casino, after all, it’s an entire metropolitan economy built around tourism. Complementary activities have spring up — other casinos (not just substitutes; it’s fun to casino hop), restaurants, shows, museums, wedding chapels, strip clubs, and so on. People rarely go to Las Vegas and stay in their own hotel the entire time.

This also leads to labor pooling that might give Vegas an advantage over would-be competitors. If you’re in a business that provides support services to casinos — in entertainment, gaming, security or anything else, then you’re probably in Vegas. And if you’re not in Vegas and you want to open a casino, you’ll pay a premium to get those services. One-off casinos aren’t a major threat to Las Vegas, and rival agglomerations aren’t going to be that easy to get off the ground.

The other issue is that presumably the big selling point of a rival operation would be its proximity to a major metropolitan area; if you can gamble in Los Angeles then why go to Nevada? But a casino in a major metropolitan area will have to compete for resources, including land, with other industries. How are casino margins in places with normal city land and labor prices? I don’t know, but the business model and profitability are likely to be a lot different. And travelers to casinos in proper cities would have to compete for airplane seats, and hotel rooms, and rental cars with regular business travelers. The deals that Vegas casinos offer to draw in tourists from all over the world may not work in a major metropolitan area.

It seems like a gambling city out in the middle of the desert would die a quick death if cities elsewhere could provide the same services, but that’s not how metropolitan economies work. Once the industry-specific concentration is in place, it takes a major shift in costs — or years of steady erosion of agglomeration advantages — to pull it apart. Vegas is by no means invulnerable to competition, but it’s more than people probably expect.