‘First-mover advantage’ applies to retailers – and hospitals

Is there a connection between Whole Foods’ closure and the new Augusta University Medical Center in Columbia County? Absolutely.

 

And it doesn’t take detailed finances, data or statistics to see it – only a basic economic understanding of corporate strategy.

A couple of weeks ago I wrote about Whole Foods shutting down in Augusta and I suggested a contributory factor was its lack of consumer demand and higher wage costs. There are, of course, other factors that may have impacted Whole Foods’ decision. As Damon Cline mentioned in The Chronicle (“Different grocery stores close for the same reason,” Feb. 12) Whole Foods was late to the game.

In economics we talk about a “first-mover advantage,” and EarthFare and The Fresh Market had established market share and customer loyalty that may have been hard for Whole Foods to break.

Another factor affecting profitability is location. First movers get the better pick of locations. McDonald’s, for example, has great locations. Maybe Whole Foods’ location affected its ability to attract customers?

Which leads us on to the AU Medical Center in Grovetown. Three hospitals – University Hospital, Doctors Hospital and AU Medical Center – had bid for the right to build in Columbia County because the location would greatly impact their ability to attract customers from a fast-growing population.

In economics we study the location of firms as a strategic choice. On a straight road, with customers evenly distributed along the road, firms will want to locate in the middle to attract the most customers and minimize travel costs. But as customers concentrate at one end of the road, a business will want to locate there to minimize travel costs of its consumer, which is why each hospital wanted the state-issued certificate of need.

Economics also helps you understand why certificates of need are not in the best interest of health care consumers. It generally doesn’t take even a single course in economics to understand that monopolies will charge higher prices and reduce output compared to a similar industry made up of numerous competing firms.

Certificates of need restrict competition and allow incumbent firms to act like monopolies. If these hospitals had been allowed to operate in a competitive market, then I am sure at least one of them would have already built a hospital in Columbia County to better serve its growing population.

Maybe one would have failed. But that is the competitive market – if you don’t provide a service that the customer wants at an affordable price, then you will close down.

Just ask Whole Foods!

 

Simon Medcalfe is an associate finance professor and the Cree Walker Chair at Augusta University’s Hull College of Business.

 

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