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Advance-Purchase Financing of Projects with Few Buyers

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  • Marco Sahm

    (University of Bamberg and CESifo Munich)

Abstract

I investigate a simple model of advance-purchase contracts as a mode of financing costly projects. An entrepreneur has to meet a capital requirement in order to start production and sell the related good to a limited number of potential buyers who are privately informed about their willingness to pay. I find that advance-purchase arrangements enable more costly projects to be financed than is true for traditional funding sources. The entrepreneur uses advance-purchase surcharges as a price discrimination device. However, the discriminatory power is limited by the problem of free-riding.

Suggested Citation

  • Marco Sahm, 2020. "Advance-Purchase Financing of Projects with Few Buyers," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(4), pages 909-933, December.
    • Handle: RePEc:kap:revind:v:57:y:2020:i:4:d:10.1007_s11151-019-09742-1
    DOI: 10.1007/s11151-019-09742-1
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    Cited by:

    1. Joyee Deb & Aniko Oery & Kevin R. Williams, 2018. "Aiming for the Goal: Contribution Dynamics of Crowdfunding," Cowles Foundation Discussion Papers 2149R2, Cowles Foundation for Research in Economics, Yale University, revised Feb 2023.
    2. Joyee Deb & Aniko Oery & Kevin R. Williams, 2018. "Aiming for the Goal: Contribution Dynamics of Crowdfunding," Cowles Foundation Discussion Papers 2149, Cowles Foundation for Research in Economics, Yale University.

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    More about this item

    Keywords

    Crowdfunding; Excludable public goods; Innovation and R&D; Monopolistic provision; Pre-ordering; Price discrimination;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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