A Blessing or a Curse: The Impact of Sampling in Crowdfunding Market

Abstract

The crowdfunding market has developed fast in recent years. However, the problem of information asymmetry is still an issue for both backers and fundraisers. Hence, crowdfunding platforms design various policies to reveal more project information to backers. This paper studies the impact of product sampling, a novel policy in the crowdfunding market, and provides suggestive evidence of the underlying mechanism. A product sampling campaign can be divided into three stages chronologically. In Application Stage, backers can apply for free samples. In Trial Stage, users of free samples experience them, but no feedback reports are available. In Report Stage, at least one feedback report is published, and backers can refer to reports when making decisions. Leveraging a rich data set from a large online crowdfunding platform in China, we construct a structural model considering both the demand and supply sides of the market. We use a consideration set model to characterize the fact that backers cannot notice all projects on the crowdfunding platform. We find that sampling campaigns raise the awareness of backers on sampling projects in all stages. However, in Trial Stage, backers’ utility of supporting the project declines, which is most likely to be attributed to backers’ strategic delay waiting for valuable feedback reports. We also find that the scores of feedback reports and the number of free samples offered serve as effective quality signals of projects. These two signals largely determine how backers’ utility changes in Report Stage. Moreover, our counterfactual analysis shows that the demand for most projects rises in Application Stage but falls in Trial Stage, and half of the projects see a demand increase in Report Stage while the other half experience a decrease. Our research strives to uncover the underlying mechanisms of product sampling in the crowdfunding market, makes methodological contributions, and provides meaningful managerial implications for fundraisers and crowdfunding platforms.