Pricing strategies and mechanism choice in reward-based crowdfunding

With consideration of the ambiguity and overfunding effects, this study develops generalized models to compare the sequential and simultaneous mechanisms in reward-based crowdfunding. Ambiguity effect is a negative psychological perception of customers since they lack the information to infer the product’s quality, however, overfunding effect is a positive psychological perception that enhances customers’ confidence in the product’s quality. Theoretically, we show that the two mechanisms may dominate each other in terms of entrepreneur and the two opposite effects can play significant roles in deciding the optimal crowdfunding mechanism. Furthermore, we propose a simple compensation mechanism to improve entrepreneur’s expected payoff and the crowdfunding’s success rate under both mechanisms. Finally, we analyse the informational cascade in crowdfunding and show how entrepreneur can use this phenomenon to maximize her expected payoff.