Quality Signaling through Crowdfunding Pricing(Online Seminar)
This paper studies an entrepreneur’s pricing strategy in a reward-based crowdfunding campaign under asymmetric quality information. We propose two signaling mechanisms and investigate the relative performance of these mechanisms under different market conditions. We develop a stylized game-theoretic signaling model with both funding and regular selling periods that captures asymmetric quality information between an entrepreneur and customers. For a high-quality entrepreneur who lacks a strong fanbase, we propose a new theory on quality signaling, showing that a low funding price is the only signaling tool needed (i.e., one-price signaling); a high-quality entrepreneur should offer a good deal to customers in the funding period to increase the chance of a successful campaign to reach the regular selling period. Such an entrepreneur can increase his funding price in a separating equilibrium if he commits to his future price in the regular selling period (i.e., two-price signaling). We characterize financing target levels that allow entrepreneurs to signal quality through oneor two-price mechanisms. In particular, we show that two-price signaling is plausible for a broader range of financing target levels. When both one- and two-price signaling are plausible (i.e., when the financing target level is not large), the gap in potential high- and low-quality levels and the accuracy of the market signal on customers valuation of the product in the regular selling period determine the efficient signaling mechanism.