The pricing and efficiency of pre-Sale crowdfunding

Abstract

We construct a theoretical model of pre-sale crowdfunding with the “All-Or-Nothing” principle, in which consumers have multiple valuations on the new product. We find that crowdfunding helps resolve demand uncertainty and avoid over-investment, but also generates negative effects on social efficiency by entailing under-investment and an inefficiently high product price. Further, we show that crowdfunding is more suitable than direct investment when the new product is very costly (high fixed or variable cost), and the dispersion of consumers’ valuations is low.