On the emergence of non‐profit orchestras

In the market for live classical music, a symphony orchestra typically has fixed costs that are high relative to demand, so that the demand curve lies entirely below the average cost curve (Baumol & Bowen, 1966)—a situation in which a for‐profit enterprise cannot survive. The present study aims to explain how a non‐profit orchestra can survive in such an adverse market environment by relying on private donations, even in the absence of altruism. We argue that a financially distressed orchestra may employ a strategy to impose a non‐profit distribution constraint on itself—thus becoming a non‐profit, tax‐deductible organization—and use its member musicians' worker surplus to produce donor privileges, which enables the orchestra to induce donations from an individually rational audience by taking advantage of a tax deduction scheme. With this strategy, the orchestra can successfully extract consumer surplus from the audience to offset its loss.