Innovation Against Imitation: How to Compete with Copycats in Crowdfunding?

Abstract

Information disclosure in crowdfunding is a double-edged sword: On the one hand, releasing more information can induce more contributors to pledge; on the other hand, more public information lowers the barrier to entry and attracts opportunistic copycats. This paper investigates how the startup can compete with copycats in crowdfunding via information and financing strategies. We employ a game-theoretical model where the startup can raise capital either from crowdfunding, which helps gauge market demand but at the risk of copycats’ imitation; or from bank financing, which helps deter the entry of copycats but at the cost of more demand risk. We show that the startup uses different information strategies to weaken or expel copycats if entry is not blockaded, i.e., prevented with extra effort. Imitation efficiency and crowdfunding market proportion are the main determinants for selecting the appropriate information strategy. Moreover, The optimal information strategy is non-monotonic regarding different types of crowdfunding markets and copycats. We further study two financing strategies’ social impact and find that crowdfunding achieves a weak “win-win-win” situation for the startup, consumers, and society when crowdfunding is dominant. Lastly, we find a more efficient copycat or higher bank financing accessibility does not always improve consumer surplus or social welfare, instead of the other way around as one may intuitively think. Furthermore, while crowdfunding has its benefits, startups contemplating crowdfunding must consider the potentially detrimental effects of copycat’s imitation. Our study provides insights for startups on how to compete with copycats in crowdfunding markets via appropriate information disclosure and financing choice.

Keywords: Crowdfunding, bank financing, imitation, copycats, information disclosure, demand risk