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

33 Pages Posted: 27 Feb 2023

See all articles by Zepeng Chen

Zepeng Chen

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Fasheng Xu

Syracuse University - Whitman School of Management

Date Written: February 21, 2023

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

Suggested Citation

Chen, Zepeng and Guo, Xiaomeng and Xiao, Guang and Xu, Fasheng, Innovation Against Imitation: How to Compete with Copycats in Crowdfunding? (February 21, 2023). Available at SSRN: https://ssrn.com/abstract=4365788 or http://dx.doi.org/10.2139/ssrn.4365788

Zepeng Chen

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

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

HOME PAGE: http://zep-chen.github.io/

Xiaomeng Guo

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

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

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/

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

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