Signaling Product Quality For Reward-based Crowdfunding Under Competition

Crowdfunding is a new technology-enabled innovative process that is changing the capital market space.Recently,it has been a trend of using reward-based crowdfunding for developing consumer technology products,which often takes the form of the completed product if it is successfully produced.Although crowdfunding provides an efficient way for creators to raise their capital,one of the great risks faced by the creator is the potential risk being plagiarized,as the creators should describe their business idea in the public web site.This paper investigates that whether and how a creator,who designs a reward-based crowdfunding campaign for an innovation product facing the potential risk being plagiarized,can signal his private quality information through price.Specifically,this paper develops a two-period signaling game theoretic model with a creator,who initially shares his business campaign in a crowdfunding platform but can strategically release information about his product quality through price signaling,and an imitator,who begins developing a competing product as soon as she becomes aware of the creator’s product.The main conclusions are:Firstly,this paper investigates the optimal campaign design strategy of a creator facing the potential risk being plagiarized under complete information.It shows that the creator should set the highest possible reward price and the lowest possible funding target.Secondly,this paper characterizes the conditions under which the creator who possess private quality information can signal this information through price.It shows that the creator can signal his quality information through price when the size of the future market is small,and both high-and low-type creator have incentive to distort their price to achieve separation.Finally,this paper finds that the creator should strategically signal his product quality information by trading off between the success rate of the crowdfunding campaign and the competition intensity in the regular sale stage.Specifically,it is interesting to show that the creator with high quality product may not choose to signal their quality information so as to confuse the imitator and alleviate the competition in the future market,though this purposeful concealment may hurt the fund raised in the crowdfunding campaign.Moreover,we also show that the low-type creator may have the higher incentive and will be the one to signal quality information by distorting his reward price under some conditions.