Crowdfunding Strategy with Word-of-Mouth Communication

39 Pages Posted: 24 Nov 2020

See all articles by Fasheng Xu

Fasheng Xu

Syracuse University - Whitman School of Management

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: October 9, 2020

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

Suggested Citation

Xu, Fasheng and Guo, Xiaomeng and Xiao, Guang and Zhang, Fuqiang, Crowdfunding Strategy with Word-of-Mouth Communication (October 9, 2020). Available at SSRN: https://ssrn.com/abstract=3707839 or http://dx.doi.org/10.2139/ssrn.3707839

Fasheng Xu (Contact Author)

Syracuse University - Whitman School of Management ( email )

721 University Avenue
Syracuse, NY 13244-2130
United States

HOME PAGE: http://www.fashengxu.com

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

M624, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies ( email )

M634, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon
China

HOME PAGE: http://xiaog.weebly.com/

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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