Competition and Collusion
A study at Drexel University’s LeBow College of Business authored by Teresa Harrison, academic director of the Gupta Governance Institute’s Center for Nonprofit Governance, along with Jeremy Thornton of Samford University, develops a novel approach to measure the level of competition in US nonprofit sectors and shows that a relatively small number of nonprofit organizations is needed to establish robust competition in donor markets.
- In US nonprofit sectors that rely primarily on donor funding, markets reach competitive levels once four or more nonprofit organizations have entered.
- The competitive behavior of nonprofit organizations entering the donor markets is similar to the behavior of for-profit firms. The donation competitive pressure in nonprofit sectors acts as a governing mechanism similar to what we would expect in for-profit settings, a finding which may be reassuring to boards and funders.
- The empirical approach set out in the study provides a novel framework to measure competition intensity for different types of nonprofit sectors. It is based on donor population and, therefore, it does not require information about prices and quantities for goods and services.
Summary of Complete Findings
In the for-profit sector, market competition is known to create the most powerful incentive for companies to use resources efficiently, as well as to produce products and services at the lowest possible cost and at the best quality. This study highlights the importance of this incentive in the US non-profit market. It shows that competitive pressures operate similarly in nonprofit organizations as for-profit organizations, despite significant differences in governance, ownership structure, organizational objectives, and management incentives.
In the nonprofit sector, consumers are represented by donors, foundations, government agencies, or fee-paying clients. Competitive markets allow users to choose the nonprofit organization that provides the best service, while funders offer their scarce resources to the most efficient or effective nonprofit.
The authors examine 10 nonprofit subsectors whose primary source of funding are donations. Their empirical methodology can be generalized to other sources of revenue solicited by a nonprofit, such as government grants, foundation awards or fee-for-service clients.
The reasoning behind the empirical model is as follows. When a nonprofit organization is alone in the market, it can solicit the most valuable donors and earn the highest possible total dollar value for each solicitation. A second organization will enter the market only if it is able to cover both the costs of charitable production and their cost of solicitation. This implies that the donor market must be of sufficient size to support two organizations. With two organizations, the donor market is split, and nonprofits must expect lower donations from their average donor. As entry of new organizations continues, the marginal net revenue from donations (i.e. the additional donations net of fundraising costs) declines. New organizations will continue to enter the market only if they can, at least, breakeven (i.e. their total revenues are equal or greater than their total costs). Entry will stop when the revenue from the donor population cannot finance the costs of an additional nonprofit organization. At that point, nonprofits will have achieved an efficient outcome, meaning that organizations would be raising just enough revenue to cover their true cost of production. In other words, competitive pressures can be relied upon to drive out nonessential expenditures and organizational slack in nonprofit sectors similar to for-profit sectors.
The authors estimate the breakeven thresholds for nonprofits in different sectors. Such thresholds are based on the donor population required to support a given number of nonprofit organizations and, therefore, do not require the use of prices or quantities which is common in other approaches investigating competitive pressures.
They find that the breakeven thresholds are reached when four organizations enter a subsector. This result is consistent across all subsectors, despite the variety of output and revenue structures represented across the 10 subsectors tested in the study. The research also finds that the impact on competitiveness of an additional entrant is nonlinear, with the greatest effect generated by the second and third new competitors into the market.
Interestingly, the findings are very similar to the results found among for-profit industries. This correspondence suggests that donation competition operates similarly in nonprofit organizations as for-profit organizations.
In conclusion, contrary to common thinking, competition is a commanding force in shaping the behavior and decisions of nonprofit organizations as much as for-profit ones. Nonprofit organizations have a fundamental role in the delivery of public services. It is therefore reassuring to find out that a relatively small number of nonprofit organizations can ensure robust competition in a nonprofit sector and, with it, the best value in the delivery of essential services to society from nonprofit providers.
“Further Evidence on Competition in Nonprofit Donor Markets” by Teresa Harrison (Drexel University) and Jeremy Thornton (Samford University), was published in Nonprofit and Voluntary Sector Quarterly, 2021.
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