Crowdfunding under Social Learning and Network Externalities

Abstract

In rewards-based crowdfunding, a firm (campaigner) pre-sells a new product and solicits financial contributions from the crowd (consumers) to cover production costs. When a crowdfunding product with uncertain quality is first introduced, consumers may choose to strategically delay their purchase in anticipation of product quality reviews. This paper investigates how the presence of both social learning and network externalities affects the strategic interaction between a crowdfunding firm and forward-looking consumers. Our research yields three main insights. First, we find that in the presence of social learning and strong network externalities, an upward-sloping demand curve may arise. This so-called Veblen effect occurs due to the interaction between social learning and strong network externalities. Second, we show that network externalities have important implications for the optimal crowdfunding reward choice. In particular, under strong network externalities, the optimal reward will induce all consumers to either adopt the product early or adopt the product late; whereas under weak network externalities, the consumers will possibly adopt the products in different periods. Third, we characterize the optimal reward strategy under financial constraints and quantify its impact on the optimal reward choice and the induced purchase pattern from consumers. These insights provide useful guidance on how firms can exploit the benefits of crowdfunding.

Keywords: Crowdfunding, reward, social learning, network externalities, strategic consumer behavior, Veblen effect