Crowdfunding as a Vehicle for Raising Capital and for Price Discrimination

Abstract

Crowdfunding campaigns are traditionally used as a means for entrepreneurs to raise capital to fund the development of new products. We show that reward-based crowdfunding may serve an additional purpose of allowing entrepreneurs to successfully implement price discrimination. The entrepreneurs’ ability to implement such price discrimination depends on the extent to which they are eager to raise capital through the crowdfunding campaign in comparison to the eagerness of contributors in the campaign to ensure that the product becomes a reality. Specifically, we show that enhanced consumer surplus extraction through price discrimination is feasible when the total surplus that the project generates is relatively small, when the pool of potential contributors in the campaign is relatively small, and when the extent of heterogeneity in the consumer population is relatively high. In contrast, when both the development and the financing costs from traditional funding sources are relatively high the capacity of crowdfunding to serve as a price discrimination device is hampered. We also provide insights regarding the entrepreneur's choice of the funder reward and campaign goal, two decision variables that entrepreneurs traditionally set in reward based crowdfunding campaigns.