Saturday, July 3, 2010

Uncompetitive hospitals

There is a simple little game about lemon stands that they teach about in game theory classes. The setting is a beach where thirsty swimmers are scattered about. You want to put your stand where you can maximize the number of customers, given that the customers just go to the closest stand.

If no one has placed a stand you can put yours anywhere, although if the customers are deterred somewhat by walking you'll place it in the "middle" where you'll have the highest demand. If there is already a competitor's stand on the beach, where should you place your new stand? After some careful consideration you decide that you need to place it right next to the other stand because you'll take all of his customers one side and that's the best you can do.

This game is meant to illustrate why gas stations tend to be so close together and supermarkets are often right across the street from one another. Well, they are in Florida anyway where competition is cutthroat. In my hometown there is even a Lowe's that was built right across the street from Home Depot.

The lesson, then, is that in a competitive market stores are going to tend to cluster in the middle of the populace and do battle to win customers. At least until Wal-Mart crushes them.

With this in mind I was wondering why the three hospitals in my hometown are spaced so far apart. And why are they are right on the edges of residential areas? One is North of 95% of the houses, one is south of 95% of houses and one is East of 100% of the houses. They're placed as if the town was carved up by a cartel and each hospital has its own section. If health care provision was competitive shouldn't the hospitals be located closer to the heart of the city, side-by-side?

Or wait, maybe the health care sector isn't competitive. Could that have something to do with the outrageous costs?

Note: File this post under "musings not backed by careful research or good data."

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