Product-driven Entrepreneurs and Online Crowdfunding

Abstract

Advancements in information technology is known for enabling new business models and new market mechanisms. Online crowdfunding is one such new mechanism through which entrepreneurs can advertise their potential products and attract investors from the mass. In this study, we advance the existing theory on online crowdfunding markets by recognizing that online crowdfunding provides not only a venue of fundraising to entrepreneurs but also a venue for them to obtain demand information before production and to signal their intention. We formulate a spatial competition model between profit-driven entrepreneurs and product-driven entrepreneurs and find that on average profit-driven entrepreneurs earn higher profits, but their advantage is constrained by the mechanism of the crowdfunding campaign, and product-driven entrepreneurs earn a significant fraction of the market. Comparing to the Keep-it-all funding scheme we used in the baseline model, the All-or-nothing scheme is more favorable for product-driven entrepreneur, under which the two type entrepreneurs earn equal market shares. We further discuss model implications for consumer satisfaction of the platform and find that including more product-driven entrepreneurs, or adopting All-or-nothing funding scheme improves the overall quality of the platform, but the effects on design popularity and consumer welfare are subtle.