Advertising and pricing decisions for signaling crowdfunding product’s quality

Abstract

Reward-based crowdfunding assists capital-constrained firms seek financing from a crowd of investors. However, consumers participate in the crowdfunding campaign before obtaining complete quality information since the products have not yet come to the market. Hence, information asymmetry and quality uncertainty are inevitable issues for consumers and crowdfunding creators. We investigate how a capital-constrained firm can signal its crowdfunding product quality to consumers by advertising and pricing. We characterize the demand following a diffusion process and conduct a perfect Bayesian equilibrium analysis to explore the advertising and pricing decision under different signaling strategies. Our results demonstrate a new insight into the debate on the strategic signaling role of advertising, crowdfunding product price, and crowdfunding time. Firstly, We show that the firms with high-quality products will signal the quality by setting a lower crowdfunding product price, which is costly for the firms with low-quality products by reducing the first-period profit and increasing the risk of crowdfunding success. In addition, high-quality products can signal quality by reducing advertising expenditure and keeping the optimal price under complete information with low independent and herding coefficients; otherwise, they will signal quality with a high advertising expenditure. By extension, the firm with a high-quality product will separate itself from that with a low-quality product via a shorter crowdfunding time in a separating equilibrium because of the All-or-Nothing mechanism. Our study guides capital-constrained firms in designing and promoting their crowdfunding project to signal high quality.