The strategic use of managerial incentives in a non‐profit firm mixed duopoly

A mixed duopoly setting is examined where a private non‐profit firm (NPO) competes with a private profit‐maximizer. The NPO's stakeholders select a contract for their managers. A novel NPO objective function is utilized which takes into account all the likely returns to the NPO's stakeholders (NPO profits and the surplus accruing to the NPO stakeholders) in such a commercial setting. In sub‐game perfect equilibria, it is shown that the NPO's managers generally will not be given the NPO's true objective to optimize. It is also shown that aggregate social welfare may increase or decrease due to this managerial contracting behavior or the use of NPO membership fees. Copyright © 2007 John Wiley & Sons, Ltd.