Crowdfunding Strategy with Word-of-Mouth Communication

Abstract

Bank financing is a traditional source of capital for small businesses, whereas crowdfunding has recently emerged as an alternative fund-raising solution to support innovative ideas and entrepreneurial ventures. We investigate the equilibrium relationship between a firm's funding choice and word-of-mouth (WOM) communication among consumers, and its consequent impact on product quality, consumer surplus, and social welfare. Depending on what kind of information is transferred via social interactions, we look at two types of WOM: informative (where WOM expands awareness of the product in the retail market) and learning (where WOM helps consumers to learn the product's true quality in the crowdfunding market). We find that more active WOM communication always benefits the firm and favors crowdfunding adoption. However, product quality may either increase or decrease as WOM expands. More importantly, consumer surplus and social welfare always increase in informative WOM, but may decrease in learning WOM. Lastly, expansion of the crowdfunding platform (i.e., attracting more consumers as platform users) always enhances the value of crowdfunding under informative WOM, but it could discourage crowdfunding adoption under learning WOM.

Keywords: Crowdfunding, bank financing, word-of-mouth (WOM), quality, funding choice