The Price of Charity
From the Briefcase: Research produced by America's Best Business Schools
Study: "A Greater Price for a Greater Good? The Charity Premium at eBay 'Giving Works' "
Authors: Brian McManus and Daniel Elfenbein (Olin School of Business, Washington University in St. Louis)
Status: Working paper
Summary: Which would you rather buy: an iPod that costs $199 or one that costs $10 more–but sends the extra money to charity? A new study finds that even charitable giving has its limits.
Will people pay more for a product that backs a good cause? Yes, up to a point, according to studies conducted by Brian McManus and Daniel Elfenbein, two professors at the Olin School of Business at Washington University in St. Louis.
McManus and Elfenbein collected data on prices of identical items from eBay auctions–regular auctions and auctions run through eBay's "Giving Works" program, where sellers donate part of their earnings to nonprofits they select. The professors concluded that products connected to a charity command higher prices.
"Suppose eBay shoppers are looking for iPods," said McManus, an assistant professor of economics. "They find two iPods that are the same, except one is associated with a philanthropic venture. The difference in the realized prices for the iPods reflects the value consumers place on charity-linked products."
On average, McManus said products affiliated with a charity have an estimated premium that's about 5 percent higher.
"When you ask consumers, they say they're willing to pay higher prices for a charity item," McManus said. "But until now, there has been little research showing that people follow through with their intentions."
McManus's and Elfenbein's results are reported in their working paper, "A Greater Price for a Greater Good? The Charity Premium at eBay 'Giving Works.' " It indicates that people will pay more for a product that promotes a good cause–within certain limits.
In addition, their research determines that nonprofits realize value from selling retail items. The extra price people pay diminishes as the auction item gets more expensive. Individuals seem to have a maximum donation they're willing to make. As the item's price increases, that amount becomes a smaller percentage of the total price.
McManus said the eBay charity premium might be constrained further because bidders determine prices, but sellers select the charities. Bidding may be less aggressive if the seller's charity is unpopular.
This research provides useful information for nonprofits–as well as companies like Gap, which participates in (PRODUCT) RED, a campaign that donates sales profits to the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
"The Gap probably has put a lot of resources in this campaign," McManus said. "To be worthwhile, the campaign should stimulate demand. Otherwise, the Gap and the celebrities in the ads could support their causes more effectively through different activities."