Are donors afraid of core costs? economies of scale and contestability in charity markets∗

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.