Product-driven entrepreneurs and crowdfunding

Advancements in information technology is known for enabling new business models and new market mechanisms. Online crowdfunding is one such new mechanism through which entrepreneurs can advertise their potential products and attract investors from the mass. In this study, we advance the existing theory on online crowdfunding markets by recognizing that online crowdfunding provides not only a venue of fundraising to entrepreneurs but also a venue for them to obtain demand information before production and to signal their intention. We formulate a spatial competition model between profit-driven entrepreneurs and product-driven entrepreneurs. We find that, while, on average, profit-driven entrepreneurs earn higher profits than product-driven ones, their advantage is constrained by the mechanism of the crowdfunding campaign, and product-driven entrepreneurs earn a significant fraction of the market. We also discuss model implications on consumer satisfaction and crowdfunding platform design.