DP7978 | Entry and fixed costs in charitable sectors

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01/09/2010

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Abstract

Fixed costs that are not sunk do not translate into entry barriers against for-profit competitors. We show that in the case of non-commercial, not- for-profit providers, the presence of fixed costs may protect the position of an inefficient incumbent. In these situations, successfully contesting the position of incumbents may require new providers to adopt a for- profit organizational form ? notwithstanding the moral hazard problem that this might entail when quality of provision is difficult to monitor ? or, alternatively, to secure core funding from government or from a large private donor.