Economic Systems 32 (2008) 326–334

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Economic Systems
jo urnal homepage: www.elsevier.com/loc ate/ecos ys

Welfare impacts of a non-profit firm in mixed

commercial markets
Gregory E. Goering *
Department of Economics, University of Alaska, P.O. Box 756080, Fairbanks, AK 99775-6080, USA

A R T I C L E I N F O A B S T R A C T

Article history: Utilizing a model that allows for the welfare of the commercial
Received 16 July 2007 NPO’s stakeholders directly in terms of their consumer surplus,
Received in revised form 4 December 2007 and indirectly in terms of NPO profits, we explore the impact of
Accepted 4 June 2008
changes in the NPO’s ‘‘social concern’’ for consumers on market
efficiency. Three separate Cournot mixed market scenarios are
Keywords: analyzed: competition between the NPO and a private for-profit
Mixed markets firm, competition between the NPO and a public firm, and a market
Technical efficiency
scenario that includes all three firms. We find that the technical
Non-profit firms
efficiency of the NPO vis-à-vis the profit maximizer is crucial in
JEL classification: determining whether social welfare rises or falls as the NPO places
L12 more weight on their stakeholders’ surplus. In particular, if the
L15
NPO is less technically efficient than the profit maximizer or public
L21
firm, somewhat paradoxically social welfare may fall as the NPO
shows a greater social concern for consumers. In other words, a
movement away from pure profit maximizing behavior by a NPO
may well be detrimental in these mixed commercial markets. We
also show the additional sources of revenue available to a NPO may
decrease the overall welfare in these mixed market situations.
ß 2008 Elsevier B.V. All rights reserved.

1. Introduction

The phenomenon of mixed markets, where firms with varying objectives compete, has drawn a
good deal of interest of late. In particular, mixed commercial markets where non-profit firms (NPO)
operate are important, since a significant and increasing share of economic activity, both in terms of
production and employment, occurs in the U.S., and indeed globally. Case (2005) notes that in the U.S.,

* Tel.: +1 907 474 5572.

E-mail address: ffgeg@uaf.edu.

0939-3625/$ – see front matter ß 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.ecosys.2008.06.002
 G.E. Goering / Economic Systems 32 (2008) 326–334 327

‘‘commercial’’ or ‘‘business’’ NPO revenue is in the billions. Weisbrod (1997) shows employment in
NPOs is growing rapidly and was already a substantial 15% by 1990 in the U.S. Additionally, Schiff and
Weisbrod (1991) argue that there has been a rapid rise in competition between for-profit firms and
NPOs.
Traditionally, NPOs have operated primarily in the social services arena: health care, education,
and the arts. For example, Schiff and Weisbrod (1991) argue that University bookstores are often NPOs
and, of course, compete in mixed commercial markets with for-profit booksellers. However, it seems
likely that other sectors of the economy may see NPO activity in the future. Indeed, some existing case
studies of these commercial NPOs in the service sector (examined fully in Bennett et al., 2003) include
a water utility, a rail track maintenance company, and a private air-traffic control organization.1 Benz
(2005) further notes that a non-profit organizational structure may eventually even occur in the high-
tech markets.
This rise of commercial activities among NPOs has often been attributed to the NPO’s desire to help
subsidize its primary mission activities (e.g., Schiff and Weisbrod, 1991, and Weisbrod, 1998).
However, other authors such as Bennett et al. (2003, 2006) argue that this commercial activity may be
due to other factors. In particular, Bennett et al. (2006) argue the rise in commercial NPOs is due to the
fact that net earnings (profit) from the commercial activities may be more reliable than the NPOs’
other sources of likely revenue.
The bottom line is that ‘‘commercial NPOs’’ are very widespread and are likely to become even
more so in modern industrialized economies. This begs the question of the effectiveness of the
‘‘commercial’’ not-for profit model (in terms of social welfare) in mixed market settings where they
may compete with for-profit and publicly run firms. The objective functions of these three types of
firms are obviously different. Indeed, Marwell and McInerney (2005) argue that there is a ‘‘profit
continuum’’ in these mixed commercial markets from strictly for-profit firms to NPOs, publicly run
firms notwithstanding (see Horwitz, 2005). Publicly managed firms are typically assumed to
maximize social welfare (industry profits plus consumer surplus), for-profits, of course, maximize
their own profits, but the objectives of NPOs are more illusory.
NPOs’ objectives, particularly in light of the NPO’s non-distribution constraint on net profits, have
been modeled in various ways.2 For example, Mique and Belanger (1974) model a NPO by using a
discretionary spending and output approach. James (1983), on the other hand, supposes that
managers gain utility from any services that are provided free, and lose utility from so-called
commercial (profit-making) endeavors.3 Hansmann (1980, 1987) alternatively defines a purely
‘‘donative NPO’’ as one that simply derives revenues from donations. Finally, Schiff and Weisbrod
(1991), Du Bois et al. (2004), and Case (2005) contend that NPOs do provide net earnings (from
commercial activities) to stakeholders through ‘‘disguised profits’’ or ‘‘un-related business income’’.
Following Goering (2007), we suppose that a commercial NPO is midway between pure profit
maximizing firms and government operated (public) firms in terms of its objectives. Hence, we suppose
that a NPO with commercial activities seeks to maximize its profits and the consumer surplus accruing to
its stakeholders. This captures the notion that returns to NPO stakeholders can come from either NPO
profits (which are reinvested in the NPO’s operations) or surplus that accrues directly to them. Thus,
NPOs show ‘‘social concern’’ in terms of their members’ consumer surplus, which differentiates them
from pure for-profits. However, since they do not look at market (other firm’s) profits or total consumer
surplus (only their stakeholders/members) they do not act as a public firm either.
In this setting, where NPOs show social concern in this manner, the question is how effective are
they in these mixed market settings? In other words, does the existence of such commercial NPOs in

1
In particular, these companies are Glas Cymru, a Welsh water utility which is controlled by its members, Network Rail,
which manages the UK rail system, and Nav Canada, which is a private NPO that manages the Canadian civil air navigation
service. Nav Canada in particular is of interest, since it competes with for-profit firms in mixed commercial markets for pilot
training courses and other related services.
2
NPOs cannot legally distribute residual earnings to any stakeholders that have ‘‘influence’’ over the firm. As Hansmann
(1980, p. 838) states: ‘‘Net earnings, if any, must be retained and devoted in their entirety to financing further production of
services that the organization was formed to provide.’’ Note, this does not imply that NPOs cannot earn profit, it simply means
any residual earnings must be reinvested in the NPOs’ activities rather than distributed to stakeholders or members.
3
Schiff and Weisbrod (1991) also assume this.
328 G.E. Goering / Economic Systems 32 (2008) 326–334

mixed markets improve social welfare or does social welfare tend to decline? The key to this is the
NPO’s technical efficiency relative to the other firms. If a NPO is less efficient than for-profits, for
example, will social welfare be improved as the NPO shows more social concern?
The technical efficiency of non-profits in the literature is a very mixed bag.4 There may be
structural reasons why they are less technically efficient than for-profit firms. For example, Hansmann
(1987) notes, NPOs likely face a severe hurdle vis-à-vis a for-profit in their ability to raise capital for
technological improvements. Additionally, Schiff and Weisbrod (1991) and Roomkin and Weisbrod
(1999) argue that NPOs ‘‘may lack incentives for efficiency’’ on payouts to their managers due to the
NPOs’ non-distribution constraint. Indeed, the technical inefficiency of NPOs is found empirically by
Fizel and Nunnikhoven (1992) (profit seeking nursing homes are likely to be more technically efficient
than their NPO counterparts), as well as Anderson et al. (1999) (non-profit status tends to reduce the
firm’s efficiency). On the other hand, Francois (2001, 2003) and Benz (2005) argue that a NPO’s
employees likely value the quality of the services provided more than for-profit’s and tend to have
more job satisfaction (decreased shirking and motivation costs). NPOs may also benefit more from
economies of scope than for-profit firms. Consequently, a NPO may have higher technical efficiency
than for-profits. Finally, Register and Bruning (1987) find no significant difference between NPOs and
for-profits in a survey of 457 U.S. hospitals, a finding which is echoed by Vitaliano and Toren (1994) in
the nursing home industry. Then, of course, there is the entire issue of the technical efficiency of a NPO
vis-à-vis a publicly run firm, which is also an open question.
Since it seems that in a given mixed market any technical efficiency ranking may prevail among the
three types of firms (non-profit, for-profit and public), we explore the impact of technical efficiency in
a constant cost mixed Cournot setting. We analyze three different mixed markets: competition
between a NPO and pure for-profit firm, competition between the NPO and a publicly managed firm,
and a final scenario which includes all three firm types. We find that the technical efficiency of the NPO
vis-à-vis the profit maximizer is crucial in determining whether social welfare rises or falls as the NPO
places more weight on their stakeholders’ surplus. In particular, if the NPO is less technically efficient
than the profit maximizer or public firm, we show social welfare may indeed fall as the NPO shows a
greater social concern for consumers.5 Interestingly, we also find that the efficiency of the for-profit
firm only has an impact on the mixed market efficiency in the absence of a public firm.

2. NPO, for-profit, public firm Cournot model

As in Goering (2007), we suppose that the NPO is a so-called ‘‘commercial or business’’ NPO and not
a ‘‘donative’’ NPO as Hansmann (1980, 1987) defines.6 We further assume that the NPO’s rival is a pure
profit maximizer, a public social welfare maximizer, or both in a mixed market Cournot setting.
The following linear inverse market demand,

p ¼ a  bQ ¼ a  bðqn p þ q p þ q f p Þ (1)

is utilized, where Q is the market output, qnp  0 is the NPO’s output, qp  0 is the public firm’s
output, and qfp  0is the for-profit firm’s output.

4
As noted by an anonymous referee, technical efficiency and cost-differentials are typically used as synonyms, but really are
not. For example, one firm may have lower costs than another, i.e., a cost differential may exist between them. However, even
the low cost firm may have higher costs than necessary. Hence, neither is ‘‘technically efficient’’ per se, but the low cost firm is
more ‘‘technically efficient’’ than the high cost firm. Since the existing literature uses the term in the latter sense, we also use the
term in this manner for ease of comparison.
5
This is important for the existing policy debate on firm social concern. Typically, it is argued that increasing social concern or
responsibility is necessarily welfare improving. For example, the European Union Commission’s Green Paper (2001), ‘‘Promoting
a European framework for corporate social responsibility,’’ implicitly assumes that social concern is welfare improving. Frank
(2003) also argues that social concern increases social welfare, i.e., enhances the ‘‘common good.’’ In this paper we show that
this is not necessarily true, since social welfare is also likely dependent upon the technical efficiency of the socially concerned
firm or NPO. Hence, an increase in ‘‘social concern’’ may actually decrease social welfare and any analysis of the impact of social
concern cannot be divorced from the NPO’s technical efficiency.
6
Commercial NPOs sell their output and services, which provides them revenue. Donative NPOs, on the other hand, provide
their services for free and rely on donations for their operating revenues (e.g., free legal services and rescue missions).
 G.E. Goering / Economic Systems 32 (2008) 326–334 329

For tractability the three firms are assumed to have production costs that are constant at the
margin: Cnp, Cfp, Cp  0. We do not impose any a priori restriction on the relative technical efficiency of
these firms since the evidence on this is mixed, as noted in Section 1. We analyze three different mixed
market settings where the NPO competes separately with each the for-profit and public firm, and then
with both simultaneously. This allows us to explore the impact of changes on the relative technical
efficiency of the three firm types in a wide range of mixed market settings.
Given the linear inverse demand in (1) and the cost assumptions outlined above, we can specify the
objective functions and output maximization problems of the three types of firms as:

Max p f p ¼ ða  bQ  c f p Þq f p (2)
qfp

bQ 2
Max W p ¼ ða  bQ  c p Þq p þ ða  bQ  cn p Þqn p þ ða  bQ  c f p Þq f p þ (3)
qp 2

ubQ 2
Max V n p ¼ ða  bQ  cn p Þqn p þ (4)
qn p 2

Eq. (2) is simply the profit maximization problem of the for-profit firm. The public firm maximizes a
social welfare objective in (3), which includes all possible returns in the form of profit for the three
firms plus market consumer surplus. The NPO’s objective and maximization problem is given by (4).
Here we suppose that the NPO wishes to maximize profits plus the consumer surplus that accrues to
its members/stakeholders.7 Hence, the parameter 1  u  0 is the percentage of the total market
surplus that is captured by the non-profit’s members/stakeholders. If the NPO’s stakeholders capture
the total market surplus, then u = 1. If, on the other hand, none of the consumer surplus accrues to
these stakeholders, u = 0. This allows us to specify a commercial NPO’s objective function as a simple
parameterized combination of profits and consumer surplus. The inclusion of a fraction of the market
consumer surplus u can also be thought of as the non-profit’s ‘‘social concern’’ or care for consumer
outcomes in the market.8 Note, however, that the NPO does not consider the profits of any rival firms
nor does it take into account surplus that accrues to non-members. Thus, its objective function differs
from either a for-profit or a publicly managed firm, and captures Marwell and McInerney’s (2005)
notion of a ‘‘profit continuum’’ in these mixed commercial markets.
Given the objective functions in (2)–(4), we now analyze the three different mixed oligopoly
outcomes and show the technical efficiency conditions under which a commercial NPO’s social
concern, u, increases or decreases the social (total) welfare of the market.

3. Mixed market competition between a commercial NPO and a for-profit firm

We first analyze the simple duopoly case where Cournot competition occurs between the NPO and
a single for-profit firm. Thus, we set the public firm’s output equal to zero in this section (qp = 0) and
ignore (3). This setting allows us to explore the fundamental driver of welfare changes caused by the
NPO’s social concern.
The simultaneous maximization of (2) and (4) gives the following equilibrium outputs9:

ð1  uÞa þ ðu  2Þc f p þ cn p
qf p ¼ (5)
ð3  uÞb

7
See Goering (2007) for a more complete rationale for this novel NPO objective function and a review of other objective
functions assumed in the literature for non-profits. Goering (2007) shows that NPO members may well instruct their managers,
for strategic purposes in a two-stage game setting, to maximize an objective function other than the non-profit member’s true
objective function.
8
In particular, Ben-Ner and Van Hoomisen (1993) note that NPOs really only endure if their members ‘‘have a voice’’ and their
welfare and wishes are accounted for in the NPO’s operations (positive u in this setting).
9
Although beyond the scope of the current paper, it would also be of interest to see how the timing of the firms’ output
decisions influences the welfare in the market, i.e., Stackelberg outcomes are undoubtedly of interest but are left for future
study.
330 G.E. Goering / Economic Systems 32 (2008) 326–334

að1 þ uÞ  2cn p þ ð1  uÞc f p

qn p ¼ (6)
ð3  u Þb

The optimal non-negative outputs in (5) and (6) indicate, of course, that even in the case of
symmetric costs (cnp = cfp) the outputs will not be identical due to the difference in the firm’s objective
functions. The NPO, for given technical efficiency, will provide a higher level of output than the for-
profit since it exhibits social concern for consumer surplus that is not shown by a pure profit-
maximizer. In other words, a commercial NPO, ceteris paribus, will have a greater incentive to produce
output than a for-profit firm. This tends to increase welfare as long as the NPO is not technically
inefficient relative to the for-profit provider. This simple fact provides the intuition for the following
findings and propositions.
To formally show this, we substitute (5) and (6) into the welfare function in (3) (given qp  0 here).
Differentiating the welfare function with respect to the NPO’s concern for consumer surplus u gives

@W  ð2a  c f p  cn p Þðaðu  1Þ þ cn p ð5  2uÞ þ c f p ðu  4ÞÞ

¼ 3
(7)
@u ðu  3Þ b

Remembering that 1  u  0, the comparative static derivative in (7) is determined by the sign of
(8):

aðu  1Þ þ cn p ð5  2uÞ þ c f p ðu  4Þ (8)

Eq. (8) can be of either sign depending upon the relative technical efficiency of the NPO vis-à-vis the
for-profit. If the NPO is at least as technically efficient as the for-profit (cnp  cfp), it is easy to show that
(8) is negative, implying that (7) is positive (see Appendix).10 Hence, if the NPO is at least as technically
efficient as its profit-maximizing rival, social welfare unambiguously improves as the NPO shows a
greater social concern. In this case the NPO’s incentive to expand output beyond pure Cournot profit-
maximizing levels can only enhance social welfare since there is no cost inefficiency in this case.

Proposition 1. As a commercial NPO shows greater social concern (u increases), social welfare unambiguously
increases given the NPO is at least as technically efficient as its for-profit rival (cnp  cfp).
Note that (8) shows the simple intuition for Proposition 1, i.e., it illustrates the tradeoff between the
NPO’s objective function and its possible technical inefficiency. Compared to its for-profit rival, the
NPO’s objective function is closer to a social planner’s, since it includes (at least partially) the market
consumer surplus (positive u). This, ceteris paribus, increases the efficiency and desirability of the NPO
mixed outcome, since it induces the NPO to increase its output from the pure profit maximizing level.
As long as the NPO is more technically efficient then its for-profit rival (cnp < cfp), there is also a cost
advantage, as it produces a higher market share. In other words, both of these effects work in the same
direction, so that social welfare unambiguously increases, as Proposition 1 states. However, if the NPO
is less technically efficient than the for-profit rival (cnp > cfp), there is a corresponding penalty as it
produces a larger output level and market share, i.e., these units are produced at a higher cost than
necessary. This, ceteris paribus, decreases efficiency and social welfare. Thus, (8) shows the tradeoff
from these two opposing forces in this stylized setting when cnp > cfp.
Note also that (8) tends to be negative for relatively ‘‘large’’ markets (large demand intercept a
relative to the NPO’s marginal cost cnp). This illustrates that in larger markets the benefit of the NPO’s

10
Note that the major results can be generalized to more complicated games where several NPOs or for-profit firms compete
in the market simultaneously, rather than just one of each type. For example, if we suppose two for-profit firms compete with a
W ð3a2c f p c n p Þðaðu1Þþc n p ð113uÞþ2c f p ðu5ÞÞ
single NPO, Eq. (7) becomes @@u ¼ 3 ;where cfp is now the marginal cost for both for-profit
ðu4Þ b
firms. In the same manner as the simpler two firm cases above, it can be shown that as long as a NPO is at least as technically
efficient as its for-profit rivals, social welfare necessarily increases as the NPO’s social concern rises. On other hand, if we
 ð3a2cn p c f p Þðaðu1 þu2 1Þþcn p ð3u1 u2 Þþc f p ðu1 þu2 5ÞÞ
suppose two NPOs compete with a sole for-profit firm, Eq. (7) analog is@@u
W
¼ ;-
1 ðu1 þu2 4Þ3 b

where cnp is now the marginal cost for both NPOs and u1 and u2 represent the two NPOs’ individual levels of social concern.
Although significantly more complicated, with reasonable restrictions on the levels of social concern u1 and u2 (e.g., their sum is
less than or equal to one so they in total do not place more weight on consumer surplus then a pure social planner), we can
generalize proposition 1, once again, to the two NPO oligopoly cases.
 G.E. Goering / Economic Systems 32 (2008) 326–334 331

social concern (inclusion of members’ consumer surplus in the objective function) is large relative to
any technical inefficiency costs and therefore social welfare tends to rise as (u increases).
In summary, if the NPO is less technically efficient (cnp > cfp) than its rival, as many studies argue
(e.g., Fizel and Nunnikhoven, 1992, and Anderson et al., 1999), there is a cost penalty to these units
produced by the NPO and social welfare may decline as the NPO exhibits a greater concern for
consumers, particularly in relatively ‘‘small’’ markets. To illustrate this in a simple example, suppose
for the moment the for-profit firm has zero costs and the non-profit is less technically efficient with
positive costs at the margin (cnp > cfp = 0). Simplifying (8), we see that a(1  u)/(5  2u) < cnp implies
social welfare will decline as the commercial NPO becomes more ‘‘socially concerned’’. For example,
the parameterization a = 3cnp would ensure that in this case for any level of social concern 1  u  0.11

Proposition 2. As a commercial NPO shows greater social concern (u increases), social welfare may fall if the
NPO is less technically efficient than its for-profit rival (cnp  cfp).
Proposition 2 indicates that in a mixed market setting, social welfare may indeed decline as the
NPO moves further away from pure-profit maximization and exhibits a greater concern for consumers
in the market. In this case even though a NPO may have a more ‘‘laudable’’ goal, i.e., an objective closer
to a social planner’s goal (it is concerned about stakeholders/consumer outcomes in the market and
not just profits), it is counterproductive in a total welfare sense due to the NPO’s technical inefficiency.
Propositions 1 and 2 suggest that no general conclusions about the effectiveness (impact on social
welfare) of a non-profit organizational structure can be drawn without precise knowledge of the NPO’s
costs relative to the for-profit. The problem here, once again, is due to the fact that the NPO is
technically inefficient and shows no concern for its rival’s profits or the total market consumer surplus.
Obviously, this begs the question about what may occur in a mixed market where the NPO competes
with a public firm which does, by definition, include all surplus and profits in the market in its
objective function.

4. Mixed market competition between a commercial NPO and a public firm

We now analyze a mixed Cournot duopoly case where competition between a public firm and the
NPO occurs. In this case we let the for-profit firm’s production equal zero (qfp = 0) and ignore the for-
profit firm’s problem in (2). Thus, we simultaneously maximize (3) and (4) to obtain the equilibrium
production levels12:

ð1  uÞa þ ðu  2Þc p þ cn p
qp ¼ (9)
b

au  cn p þ ð1  u Þc p
qn p ¼ (10)
b

We see that these optimal outputs are considerably simpler than the previous case with a for-profit
competitor ((5) and (6)).13 In particular, the NPO’s level of social concern only impacts the numerator
of (9) and (10), unlike (5) and (6). The reasoning here, in this mixed market, is that the public firm
includes all surplus and profits in their objective function. In the previous for-profit rival mixed case,
as the NPO shows more social concern, it makes the NPO look increasingly less like its rival. The

11
Note in this example at higher levels of social concern (u above .5), even though the for-profit has positive profits, the NPO’s
profit is negative. Hence, the NPO would need to have a revenue source other than from the sales of units to maintain this over
time. This raises an interesting question about the NPO’s ability to sustain negative profit equilibria over time. If they have other
revenue sources in the form of grants, donations, or membership fees, they may well be able to operate at loss indefinitely unlike
their for-profit counterpart.
12
As in the previous section, the second-order conditions are satisfied here given the constant returns and linear demand
assumptions.
13
Note, however, that these equations are considerably more complex than the standard constant cost public firm/for-profit
firm mixed Cournot duopoly setting. In particular, (10) shows a non-profit’s optimal output will depend upon the scale of the
market (choke price a) even in a constant returns setting, unlike a for-profit and public firm mixed duopoly model where the for-
profit’s output is completely independent of the market scale (as we shall see in Section 5).
332 G.E. Goering / Economic Systems 32 (2008) 326–334

opposite occurs in this mixed case and the NPO is driven closer to its rival’s objective as u increases.
Correspondingly, the change in social welfare W* here is very straightforward:

@W  ða  c p Þðc p  cn p Þ
¼ (11)
@u b
From (11) it is very clear that an increase in a NPO’s social concern for its consumers has a positive
impact on social welfare, if the NPO is more technically efficient than the public firm. In this constant
costs scenario there is simply a swapping of production from the public firm to the NPO as u increases;
consequently, the NPO will enhance welfare if it is the least-cost firm.

Proposition 3. As a commercial NPO shows greater social concern (u increases), social welfare unambiguously
increases if the NPO is more technically efficient than its public rival (cnp < cp).
Proposition 3 can be contrasted to our results in the for-profit mixed case. Proposition 1 and
Proposition 2 indicate that in a mixed market with a for-profit competitor, an increase in social
concern of the NPO may enhance welfare even if the NPO is technically inefficient. This possibility
exists since there is a tradeoff between a more socially optimal objective, but a less technically
efficient NPO firm vis-à-vis the for-profit rival. As noted in detail in the previous section, even though
the NPO may have higher costs than the for-profit firm, its concern for consumer surplus may offset
this cost disadvantage in terms of social welfare. In the public firm mixed game there is no such
tradeoff, since the NPO’s rival public firm already includes full consumer surplus in its objective
function. In this case an increase in social concern only has a positive impact on the market if the NPO
is the least-cost provider. In other words, the NPO’s ‘‘social concern’’ for its members and stakeholders
does not have any welfare advantage here per se, as it would in a game with a pure profit maximizer.
This illustrates another instance where the increased social concern (movement away from pure profit
maximizing behavior) on the part of a NPO can reduce the total welfare in the market. Once again, no
general conclusion can be drawn about the effectiveness (social efficiency) of the non-profit structure
without precise knowledge of u and the NPO and the public firm’s relative costs.
Finally, it is worth noting once again (see footnote 6) that the ability of the NPO to sustain the output in
(10) in negative profit equilibria is pivotal. The equilibrium price in this mixed public/non-profit case is
p* = cp, consequently it is independent of the non-profit’s costs. The NPO will only have positive profit
here if it has lower costs than the public firm. If the commercial NPO is not as efficient as the public firm it
can only provide service at a loss over time through the use of other sources of revenue, i.e., membership
fees, donations and grants. Interestingly, this implies that the additional sources of revenue available to a
NPO will unambiguously decrease the overall welfare in these mixed market situations.

Proposition 4. A NPO’s additional revenue sources in the form of grants, donations, and membership fees will
decrease the overall welfare in mixed market situations if the NPO is less technically efficient than its public rival
(cnp < cp).
Of course, the converse result is also true; if a NPO has lower costs than the public firm, these extra
sources of revenue will enhance social welfare W*.
In the next section, we show that these results also hold in the mixed market setting with all three
types of firms: public, for-profit, and non-profit.

5. Mixed market competition between a NPO, a for-profit, and a public firm

In this final case we suppose that all three firm types compete in a mixed Cournot market. Thus, a for-
profit, a public, and a non-profit firm are all assumed to exist and compete in the market. This implies the
maximization of (2)–(4) simultaneously, which gives the equilibrium levels of production respectively:
cp  c f p
qf p ¼ (12)
b

ð1  uÞa þ ðu  3Þc p þ cn p þ c f p
qp ¼ (13)
b
 G.E. Goering / Economic Systems 32 (2008) 326–334 333

ua þ ð1  uÞc p  cn p
qn p ¼ (14)
b

Interestingly, we first note that (12) indicates that the for-profit firm’s output is independent of the
NPO’s cost and vice-versa. Here the for-profit only produces if it has lower costs (more technically
efficient) than the public firm irrespective of the NPO’s cost. Thus, the commonly cited finding that in
mixed oligopoly models with constant costs the for-profit firm must be more efficient than the public
firm for positive production still holds in a wider mixed market that also includes a commercial non-
profit.

Proposition 5. A for-profit firm must be more technically efficient than its public rival (cfp < cp), but not its
non-profit rival, in mixed markets for positive production, given constant returns to scale.
The rationale here is as in the previous section, given the public firm’s objective (3) includes all
possible returns in the market, in equilibrium this competition induces a pure profit maximizer to
produce only if it has lower costs than the public firm. In other words, the equilibrium market price
here is independent of both the for-profit and the non-profit’s costs and is simply p* = cp. Similarly,
note that (14) is equivalent to (10), thus the NPO provides the same level of output or service that it
does in the case where a for-profit rival does not exist. The NPO is completely unaffected by the for-
profit. Consequently, the change in social welfare W in this case is still given by (11). Indeed,
differentiating W* with respect to the social concern u gives (11) once again. Thus Proposition 3 and
Proposition 4 can be extended to the more general mixed case as well.

Corollary 1. As a commercial NPO shows greater social concern (u increases), social welfare unambiguously
increases if the NPO is more technically efficient than its public rival (cnp < cp), irrespective of the rival for-
profit’s cost.

Corollary 2. A NPO’s additional revenue sources in the form of grants, donations, and membership fees will
decrease the overall welfare in mixed market situations if the NPO is less technically efficient than its public rival
(cnp < cp), irrespective of the rival for-profit’s cost.

6. Concluding comments

In this paper a ‘‘mixed’’ oligopoly setting is explored, which includes a for-profit, a public, and a
commercial non-profit firm in a simple linear demand constant returns setting. A commercial NPO has
‘‘social concern’’ in that it takes into account the market surplus of its members or stakeholders in its
objective function. However, it is shown that the ‘‘effectiveness,’’ i.e., the social efficiency of such a
non-profit structure, depends critically on its relative technical efficiency. If the NPO is less technically
efficient than its for-profit or public rival, total social welfare in the market may indeed decline as the
NPO shows a greater amount of social concern.
In particular, we find that in a mixed quantity competition with a public rival, the NPO must have
lower costs or social welfare falls as the NPO shows more concern for its members. This is a general
result and still holds when a private for-profit firm is included in the mixed market. Even when a NPO
is only in competition with a single for-profit firm, an increase in social concern may lead to lower
welfare in the market. We calculate the conditions under which this will occur in the constant returns
to scale case. We also delineate more fully the conditions under which NPO revenue sources other
than the market sales, such as donations, membership fees, or grants, will likely lead to lower social
welfare.
The analysis is limited by a number of simplifying assumptions, primarily the linear demand and
constant cost assumptions. The relaxation of these would likely lead to other interesting results in
future models. Since a NPO may be able to sustain negative profit equilibria through the use of revenue
streams outside the market (e.g., grants or donations), the explicit modeling of such revenue sources
would undoubtedly also provide more insight on their impact on the welfare outcomes in such mixed
commercial markets.
334 G.E. Goering / Economic Systems 32 (2008) 326–334

Acknowledgements

The author gratefully acknowledges the helpful comments and suggestions of two anonymous
referees on an earlier draft of this paper. Any remaining errors or omissions are solely the author’s
responsibility.

Appendix A

To prove that (8) is negative for all cnp = cfp, we first let gcnp < cfp, substituting this into (8) and
rearranging yields

aðu  1Þ þ cn p ð2u  5 þ g ð4  uÞÞ (A1)

Given that a > cnp for positive production, we know (A1) must be negative as long as
(2u S 5 + g(4 S u) = (1 S u)). Solving this inequality we find that g I 1. Hence, as long as the NPO
is at least as technically efficient as the for-profit firm (cnp = cfp), (A1) or equivalently (8), must be
negative.

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