The current case study presents a dilemma that two nursing homes operating within the same community face due to an excessive number of underutilized beds in both facilities, which is associated with high fixed costs. In this regard, it is stated that if the admission rates remain low, the nursing homes can reduce the number of operated beds by dismissing a certain amount of workers. On the other hand, if the admission rates increase, the share of fixed costs would diminish as overall revenue would grow. However, since the decision-makers in both facilities cannot predict the future, their strategy choice is not quite straightforward. Moreover, being direct competitors, managers of each organization should consider the actions of their opponents. Therefore, the reviewed case study presents a market uncertainty scenario that can be analyzed by relying on game theory (Chiffi and Pietarinen, 2017). For this reason, the answer to whether each nursing home will reduce the number of operational beds is provided through the lenses of the framework mentioned above.
Priyan and Mala (2020) maintain that the outcome matrix can be a good visual tool for representing the possible consequences that follow various strategic decisions of two groups of people. In this respect, Table 1 illustrates potential outcomes of decisions to reduce or not reduce the number of used beds assuming that the demand for nursing homes would not grow. Contrary, Table 2 represents the possible results of similar decisions but under the condition that the admission rates would grow.
As it can be seen from the results in Table 1 and Table 2, the outcome that would equally benefit both parties is a simultaneous reduction in the number of beds used under service demand uncertainty. If it is assumed that the admission will stay the same, the decision to dismiss a certain amount of employees will reduce fixed costs in both facilities. Similarly, during an increase in demand, the bed reduction strategy will reduce costs in two organizations. Contrary, if both facilities decide not to reduce bed usage, they would be able to reduce the share of employee expenses in the case of an admissions surge. However, if there are no changes in service consumption, the entities would continue suffering the same costs as before.
If the organizations decide to apply different strategies, the outcomes would depend largely on the rate of admissions. For instance, suppose that nursing home 1 decided to reduce the bed usage while nursing home two did not. Then, if the demand grows, the former would significantly lose to its competitor. That is explained by the fact that even if both organizations could significantly reduce their costs, the second facility benefited more as it would attract more customers.
In conclusion, it can be argued that both nursing homes should seek to collaborate on the issue of fixed costs due to extensive bed usage as it is found that only this strategy can help facilities to increase profit and successfully secure all the potential risks. However, the prisoner’s dilemma shows that counterparts would rather pursue personal well-being than the common interest (Embrey et al., 2018). Therefore, it can be argued that although each nursing facility can reduce bed usage independently, it is unlikely that both organizations would do that simultaneously.
References
Chiffi, D., & Pietarinen, A. V. (2017). Fundamental uncertainty and values. Philosophia, 45(3), 1027-1037.
Embrey, M., Fréchette, G. R., & Yuksel, S. (2018). Cooperation in the finitely repeated prisoner’s dilemma. The Quarterly Journal of Economics, 133(1), 509-551.
Priyan, S., & Mala, P. (2020). Optimal inventory system for pharmaceutical products incorporating quality degradation with expiration date: a game theory approach. Operations Research for Health Care, 24, 1-13.