We study competition between nonprofit providers that supply a collective
service through increasing-returns-to-scale technologies under conditions
of free entry. When providers adopt a not-for-profit mission, the
absence of a residual claimant can impede entry, protecting the position
of an inefficient incumbent. Moreover, when providers supply goods
that are at least partly public in nature, they may be unable to sustain the
adoption of more efficient technologies that feature fixed costs, because
buyers (private donors) face individual incentives to divert donations towards
charities that adopt inferior, lower-fixed-cost technologies. These
incentives may give rise to a technological race to the bottom, where nonprofit
providers forgo opportunities to exploit scale economies. In these
situations, government grants in support of core costs can have a nonneutral
effect on entry, technology adoption, and industry performance
