Crowdfunding in a Competitive Environment

Abstract

Crowdfunding has mostly been used to finance very unique projects. Recently, however, companies have begun using it to finance more traditional products where they compete against other sellers of similar products. Major crowdfunding platforms, Kickstarter and Indiegogo, as well as Amazon have launched several projects consistent with this trend. This paper offers a model where two competing firms can use crowdfunding prior to direct sales. The model provides several implications that have not yet been tested eg.: 1) Firms can use crowdfunding strategically to signal a high level of demand for their products; 2) (reward-based) Crowdfunding is procyclical; 3) A higher platform fee may lead to higher firm profits in equilibrium; 4) Competition increases the chances of using crowdfunding compared to the monopoly case; 5) A non-monotonic relationship exists between the risk of crowdfunding campaign failure and firm profit.

Keywords: asymmetric information, crowdfunding and competition, reward-based crowdfunding, signalling, strategic entrepreneurship

JEL Classification: D43, D82, G32, L11, L13, L26, M13