Crowdfunding adoption in the presence of word-of-mouth communication

Abstract

In the fast growing markets of crowdfunding, firms launch projects not only to raise funding directly from the crowd to cover early stage investment, but also to expand product awareness via word-of-mouth (WoM) communication. In this monograph, we investigate a firm’s optimal funding choice when launching an innovative product in the market with WoM communication. We characterize the firm’s optimal quality and pricing strategies under both crowdfunding and traditional bank financing, and compare these two funding choices and their corresponding welfare implications. Among other results, we show that crowdfunding is a preferable funding choice for a project when (its success probability is below an adoption threshold). More active WoM communication always benefits the firm and favors crowdfunding adoption. However, product quality may either increase or decrease as WoM expands. Consumer surplus and social welfare always increase as WoM communication becomes more active.