Keep it or give back? Optimal pricing strategy of reward-based crowdfunding with a hybrid mechanism in the sharing economy

Abstract

Reward-based crowdfunding is a new fund-raising method in sharing economy, and it can also be a powerful tool for companies to handle the time mismatch between money invested and revenue generated in Circular Economy (CE). While all-or-nothing (AON) mechanism and keep-it-all (KIA) mechanism are both used in crowdfunding projects, some websites start using a new hybrid mechanism where the creator can keep a proportion of the funds raised even if the crowdfunding project fails. In this paper, we investigate this hybrid mechanism in reward-based crowdfunding projects. For a basic two-stage model, we find that AON can provide the creator with the largest expected revenue under different pricing policies when the valuation of investors is discrete. However, with continuous investors’ valuation, a hybrid mechanism is better for the creator, and the price in the first stage should be lower than the one in the second stage. For a three-stage model, we find that the results with continuous valuation still hold, and a hybrid mechanism will be the optimal mechanism under menu pricing with discrete valuation.