Quality Signaling Through Crowdfunding Pricing

Problem definition: This paper studies an entrepreneur's pricing strategy in a reward-based crowdfunding campaign under asymmetric product quality information. We propose two signaling mechanisms and investigate how entrepreneurs can leverage their pricing strategy to signal a high-quality project. Academic/practical relevance: This problem is relevant to practice, as asymmetric quality information is a significant concern in reward based crowdfunding. High-quality entrepreneurs seek credible mechanisms to signal the quality of projects to customers. Methodology: We develop a stylized game-theoretic signaling model with funding and regular selling periods that captures asymmetric quality information between an entrepreneur and customers. Results: We propose a new theory on quality signaling in crowdfunding. We show that contingent access to the regular selling market after running a successful crowdfunding campaign allows high-quality entrepreneurs to signal their quality through low funding prices (one-price signaling). A high quality entrepreneur can increase his funding price and still signal his high-quality level if he commits to the future regular selling price (two-price signaling). We show that the distinct feature of crowdfunding, that is, the probabilistic nature of crowdfunding, plays different roles in one-and two-price signaling. It is the driving force for the separating equilibrium in one-price signaling, and in two-price signaling, it affects how the entrepreneur should manipulate his funding and regular selling prices to reduce signaling cost. Managerial implications: Entrepreneurs should be mindful of pricing in funding and regular selling periods because it could play an essential role in signaling quality information. Our findings suggest practical tools for quality signaling in crowdfunding. We also investigate when price commitment is the most beneficial for a high-quality entrepreneur, looking for potential signaling mechanisms.

Automated summary

This study investigates an entrepreneur's pricing strategy in a reward-based crowdfunding campaign with asymmetric product quality information. It proposes two signaling mechanisms to help entrepreneurs signal a high-quality project. The research is significant in practice as asymmetric quality information is a concern in reward-based crowdfunding. The findings suggest practical tools for quality signaling and explore the conditions under which price commitment is most beneficial for high-quality entrepreneurs.