Less Than Zero: A Positive Theory of Negative Prices in for Donative Nonprofits

The paper introduces a simplified platform model of nonprofit pricing, where client and donor prices are determined jointly. The interaction of donor and client markets has been discussed for decades but has not been addressed formally. Recent advances in economic theory offer analytic tools to model interaction of multiple markets explicitly, via a platform theory of the firm. Our model extents this tool to the case of pricing decisions for donative nonprofits and offers novel guidance to managers based on the relative elasticities among its clients and donors. We demonstrate that negative prices may be optimal for the nonprofit when cross-market elasticity between clients and donors is less than the own-price elasticity to its clients. Under this circumstance, the losses endured by lowering prices to clients will be more than offset by higher donation revenues. We further demonstrate analytically that low or negative prices are not an indicator of altruistic preferences of the organization. Alternatively, altruistic preferences are not necessary to drive prices below marginal cost. Our formulation offers a novel and clearly defined framework for nonprofit managers, funders, and researchers to distinguish optimal pricing decisions for their distinct charitable missions.