Are Donors Afraid of Core Costs? Economies of Scale and Contestability in Charity Markets

Carlo Perroni, Ganna Pogrebna, Sarah Sandford and Kimberley Scharf

The Economic Journal, 2019, vol. 129, issue 622, 2608-2636

Abstract: We study contestability in charity markets where non-commercial, not-for-profit providers supply a homogeneous collective good through increasing-returns-to-scale technologies. Unlike in the case of for-profit competition, the absence of price-based sales contracts for charities means that fixed costs can translate into entry barriers, protecting the position of an inefficient incumbent; or, conversely, they can make it possible for inefficient newcomers to contest the position of a more efficient incumbent. Evidence from laboratory experiments show that fixed-cost driven tradeoffs between efficiency and perceived risk can lead to inefficient technology adoption.

Date: 2019
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