When you get down to it, elaborate madlibs are basically the core mechanic of most trpgs (especially story games!) Your choice of prose and prompt does a good job of balancing the direction of the story forward while leaving the player with lots of options to insert their own ideas about what actually takes place in the mind's eye. And, while the distinction between prose and prompt is very clear with the switch to (parenthesis and italics text) I do think a bit of layout work could make that really clear and be used to strengthen what you're trying to accomplish here!