450 / 2024-04-25 14:44:04

Crowdfunding Pricing with Network Externality

Crowdfunding,Pricing,Network Externality,Mechanism design

Network effect plays an important role in crowdfunding, especially for interactive design projects. However, network externality, which significantly impacts both backers’ utility and crowdfunding performance, has been overlooked in previous studies. To bridge this research gap, we develop a stylized two-period model that examines how network externality and crowdfunding mechanisms interact to determine the optimal strategy for entrepreneurs in reward-based crowdfunding. We find that the entrepreneur’s pricing strategies that influence backers’ participation in crowdfunding are significantly influenced by network externalities, leading to shifts in optimal pricing strategies. The dominant relationship between menu and uniform pricing strategies exhibits non-monotonic changes with respect to network externality. Counterintuitively, increasing positive network externality might hurt backers and reduce social welfare. Model extensions of a general network externality setting and differentiated product offerings are also conducted to verify the robustness of the main findings presented in this paper. Our study provides managerial insights for entrepreneurs seeking to improve their crowdfunding performance and benefit from network externality.