Monday, June 25, 2007

Non Profits Part 2

There are many models that try to match up our innate desire for the good of others to our market activities. A very popular method for raising such money for charity is the "charity auction", this is the focus of a paper that landed on my desk after Mark received it in an email from a colleague. Daniel W. Elfenbein and Brian McManus penned a paper titled A Greater Price for a Greater Good?, in which they investigate if people are willing to pay a premium for goods where the proceeds of the sale are going to charity. The data set is comprised of 2,347 eBay auctions, in which they paired charitable goods with identical (or proxy) non-charity market goods to see how much the bid increased. Not very much. It's about 6% in this study.

Side Note: I had an idea to do a paper about this by going to a church auction and place two identical goods far apart from each other so they didn't conflict and having one marked fair trade, made in while leaving the other unmarked. Run the experiment a few times and see if people pay a significantly higher price for the charitable good. That is essentially what Elfenbein and McManus do in this experiment except they have a better data set.

They extrapolate that data to differentiate the price people are willing to pay for items based on their charitable links such as "fair trade coffee versus Folgers". Previous experiments run on charity auctions indicate that people aren't willing to pay very much more for items than their retail value. This study suggests 6% more than the item's value but other papers such as Isaac and Schneir suggest no increase in bid on charitable goods over a regular retail item. (This of course doesn't account for unique one-of-a-kind items which have been found to be very good for charities)

The Main Idea: If you charge a higher price, because of your link to charity, you reduce your market size.

The implication of this statement is whether you're paying the low wage workers in another country on the front-end or the back-end. If you reduce your market by paying "fair trade" (which is sometimes hard to tell what that really means, like who is the money really going to? It may not be going to the worker in the field, an article titled The Bitter Cost of Fair Trade Coffee by Hal Weitzman from the Financial Times is one of many of the same articles) you may not be in business very long because you've just increased your cost of supplying the good, which reduces your maket.

However, if you sell your item at a competitive price then you will have a greater market. Then all things being held equal, the warm-glow of purchasing an item at a non profit versus a non-charity for profit can take effect and pull over customers. I suspect this will lead to more money for the workers in the field on the back-end. Also, by sponsoring a child or family you can assure that most of the money will be going to them.

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