An Internet-Enabled Donor-to-Nonprofit (D2N) Marketplace

1. An Internet-Enabled Donor-to-Nonprofit (D2N) Marketplace Kemal Altinkemer Purdue University Prabuddha De Purdue University Yasin Ozcelik Fairfield University Zafer Ozdemir Miami University Purdue University, West Lafayette, IN Oct. 5, 2007

2. The nonprofit sector • Close to 2 million nonprofits • U.S. households give over two percent of income to charities on average. • Accumulated assets of $1 trillion • Annual donations of about $300 billion

3. Fundraising the old-fashioned way

4. Fundraising and the Internet • Shift in giving patterns • Timely response to emergencies • Cost of campaigns

5. The new way

6. Online services for donors and nonprofits • Online database to search for nonprofits • GuideStar: www.guidestar.org • Online evaluation, accreditation, and seal programs • Charity Navigator: www.charitynavigator.org • The American Institute of Philanthropy (AIP): www.charitywatch.org • The Best Business Bureau’s (BBB) Wise Giving Alliance: www.give.org

7. Our focus • Donor-to-Nonprofit (D2N) marketplace • Issues of interest: • Pricing of database and certification services • Accessibility/awareness of the database service • Accuracy of the certification process • The effect of online services on • total fundraising revenues • fundraising effectiveness

8. Related literature • No study on nonprofits in top IS journals • Methodologically: Horizontal differentiation (linear city market) Hotelling (1929) Signaling Spence (1979) • Our analytical model • Variety in organizational missions • Fundraising activities • Variety in organizational effectiveness • Donors’ search for charities Advertising Grossman and Shapiro (1984) Search Wolinsky (1984)

9. A game theoretic model of fundraising • Spatial linear city market with 2 nonprofits at both ends. • “Potential” donors uniformly distributed along the periphery of the market. • Potential donors’ willingness-to-give to a nonprofit depends on: • awareness • mission fit • expected quality • donor’s own type (private information)

10. A game theoretic model of fundraising (continued) • Nonprofits’ qualities are not known a priori. • Potential donors may give only to those nonprofits they are aware of. • They may be contacted by one or both nonprofits. • They may search themselves (offline or online). • Nonprofits incur costs to contact potential donors. • Potential donors incur a cost each time they sample a nonprofit. • Nonprofits maximize their net fundraising revenue (following the literature on revealed objectives of nonprofits).

11. Basic structure of the market Expected quality same for both nonprofits in the benchmark case N1 N2  High willingness-to-give 1- Low willingness-to-give What’s a potential donor to do? ? ? Wait and hope to be contacted…

12. The extensive form of the game(benchmark case) • Nonprofits decide on their optimal fundraising reach (r1 and r2) and contact potential donors randomly. • Potential donors decide whether to search for a nonprofit depending on their type and whether they have been contacted. • Each donor decides where and how much to donate based on his/her type, awareness of the nonprofits in the market, and belief about their quality.

13. The market after solicitations are complete (benchmark case) N1r1 N2r2 r1r2 Fully aware Aware of N1 only r1 (1-r2) Aware of N2 only r2 (1-r1) (1-r1)(1-r2) Unaware (1-)r1r2 Fully aware (1-)r1 (1-r2) Aware of N1 only (1-)r2 (1-r1) Aware of N2 only (1-)(1-r1)(1-r2) Unaware

14. The market after solicitations are complete (benchmark case) N1r1 N2r2 r1r2 Fully aware – no search Aware of N1 only – Search for N2 Aware of N1 only – no search r1 (1-r2) Aware of N2 only – Search for N1 Aware of N2 only – no search r2 (1-r1) (1-r1)(1-r2) Unaware – search (twice if necessary) (1-)r1r2 Fully aware – no search Aware of N1 only – no search (1-)r1 (1-r2) (1-)r2 (1-r1) Aware of N2 only – no search (1-)(1-r1)(1-r2) Unaware – no search

15. The market after donations are complete (benchmark case) N1r1 N2r2 Donate to N1 Donate to N2 r1r2 Donate to N2 Donate to N1 r1 (1-r2) Donate to N2 r2 (1-r1) Donate to N1 Search once – Donate to N1 Search twice – N2 (1-r1)(1-r2) Search twice – N1 Search once – Donate to N2 (1-)r1r2 Donate to N1 Donate to N2 Do not donate (1-)r1 (1-r2) Do not donate Donate to N1 Donate to N2 (1-)r2 (1-r1) Do not donate (1-)(1-r1)(1-r2) Do not donate

16. The benchmark case result Fundraising revenues (total and net) increase with the expected quality of nonprofits and decrease with search and contact costs.

17. The D2N marketplace Provides two services: • Database – for a fee, allows potential donors to search online and observe the contact information and mission of both nonprofits. Only a fraction () of the donor population can use the service. • Certification – for a fee, allows nonprofits to certify their quality. Not perfectly accurate. Maximizes the usage of its services.

18. The extensive form of the game with the D2N marketplace • The D2N marketplace decides on which services to offer and announces its price(s) for its chosen service(s). • Nonprofits observe their own qualities and decide whether to apply for quality certification, the results of which are made available to both nonprofits. Nonprofits decide on their optimal fundraising reach (r1 and r2) and contact potential donors randomly (with or without the certification). • Potential donors update their beliefs about the quality of contacting nonprofits based on the available certification (or lack thereof).

19. The extensive form of the game with the D2N marketplace (continued) • Potential donors decide whether to search for a nonprofit depending on their type and whether they have been contacted. Potential donors may either do a traditional (offline) search or subscribe to the marketplace’s database and search there. In both cases donors learn the certification status of the nonprofit(s) they find. • Each donor decides where and how much to donate based on his/her type, awareness of the nonprofits in the market, and belief about their quality. Solve for perfect Bayesian equilibria (PBE).

20. The market after donations are complete (with the D2N marketplace) N1r1 N2r2 The segment without access to the database Donate to N1 Donate to N2 (1-)’r1r2 Donate to N2 Donate to N1 (1-)’r1 (1-r2) Donate to N2 (1-)’r2 (1-r1) Donate to N1 Search once – Donate to N1 Search twice – N2 (1-)’(1-r1)(1-r2) Search twice – N1 Search once – Donate to N2 (1-)(1-’)r1r2 Donate to N1 Donate to N2 Do not donate (1-)(1-’)r1 (1-r2) Do not donate Donate to N1 Donate to N2 (1-)(1-’)r2 (1-r1) Do not donate (1-)(1-’)(1-r1)(1-r2) Do not donate

21. The market after donations are complete (with the D2N marketplace) N1r1 N2r2 The segment with access to the database Donate to N1 Donate to N2 ’’r1r2 Donate to N2 Donate to N1 ’’r1 (1-r2) Donate to N2 ’’r2 (1-r1) Donate to N1 ’’(1-r1)(1-r2) Donate to N1 Donate to N2 (1-’’)r1r2 Donate to N1 Donate to N2 Do not donate Donate to N2 Donate to N1 (1-’’)r1 (1-r2) Do not donate Donate to N2 (1-’’)r2 (1-r1) Donate to N1 Do not donate Donate to N2 (1-’’)(1-r1)(1-r2) Donate to N1 Do not donate

22. Price of database and optimal fundraising reach Lemma: A service-maximizing D2N marketplace offers its database to the public free of charge. Proposition 1. The optimal fundraising reach increases with an organization’s expected quality level. The optimal fundraising reach increases further when the competing organization is certified.

23. Characterizing the PBE Given appropriate pricing, expected increase in net fundraising revenues due to applying for a certification should be • positive for a high quality nonprofit and negative for a low quality nonprofit in a separating equilibrium. • positive for both types of nonprofits in a pooling equilibrium. • neither of the above in a hybrid equilibrium. Potential donors’ beliefs on qualities are set in accordance with equilibrium behaviors of different types of nonprofits.

24. The perfect Bayesian equilibria of the game Proposition 2. There are three types of PBE. • Separating equilibrium: only high quality nonprofits get certified. • Pooling equilibrium: both types of nonprofits apply for certification. • Hybrid equilibrium: high quality nonprofits always apply for certification; low quality nonprofits apply with some positive probability (less than one).

25. Parametric regions for the equilibria

26. Parametric regions for the equilibria

27. Total net fundraising revenue Proposition 3. If the cost of certification is sufficiently high, the total net fundraising revenue in the market may drop after the emergence of the D2N marketplace, despite the comprehensive and free database service.

28. Comparisons of total fundraising revenues Separating equilibrium Pooling equilibrium

29. Comparisons of fundraising effectiveness Separating equilibrium Pooling equilibrium

30. Accuracy of certification Proposition 4. A service-maximizing D2N marketplace prefers a less costly and less accurate certification process over a more costly and more accurate one.

31. Implications • Charging the lowest database subscription fee helps nonprofits increase their fundraising effectiveness. • To be able to certify more nonprofits, D2N marketplaces should seek to reduce certification costs. • A reduction in the accuracy of the certification service (due to lowering its cost) is fine for D2N marketplaces. • The reduction in certification cost helps nonprofits increase net fundraising revenues (which will be used to support their own services).

32. A quote on the rating services of Charity Navigator, the AIP, and the BBB “It is irresponsible not to educate donors on the many aspects of [nonprofit] effectiveness beyond the financials.” Lowell, Trelstad, and Meehan Stanford Social Innovation Review, 2005

33. Potential future research directions • Oligopolistic competition among D2N marketplaces • Optimal design of certification criteria

34. Questions ???

35. Thank you!!!☺