Optimal reward-based crowdfunding with co-creation

While prior research has highlighted the advantages of reward-based crowdfunding, these studies do not guide firms and backers in innovative projects where backers are engaged in co-creational activities for product development before crowdfunding. To fill this gap, we develop a four-stage model where both firm and homogeneous backers devote efforts to co-creation for product design. The firm then chooses the funding mechanism, funding target, and pledging price in crowdfunding, followed by investment in production and selling in the retail market. We incorporate an essential aspect of crowdfunding into our model, allowing the firm to learn about the backers’ valuation of the product from the crowdfunding outcomes. Our proposed model is actually an extensive-form game with incomplete information, and we find the perfect Bayesian equilibrium by backward induction. Our result indicates that both fixed and flexible funding mechanisms have distinct advantages under specific conditions. Moreover, the firm should employ a markdown pricing strategy during the crowdfunding and retail stages under the fixed funding mechanism and a markup pricing strategy under the flexible funding mechanism. Furthermore, we identify conditions under which the firm could benefit from co-creation. Finally, we consider the model with two heterogeneous backers and reveal the equilibrium solutions.