Competing With Copycats in Reward‐Based Crowdfunding

ABSTRACT In reward‐based crowdfunding, creators possess private knowledge regarding the true quality of their innovative products. This presents creators with a trade‐off between signaling their true quality level to inform backers (crowdfunding investors) and concealing such information to counteract copycats. In this paper, we establish a stylized model to study the effect of copycats on creators' signaling strategy and their corresponding profits, as well as evaluate countermeasures for combating copycats. Our main findings are as follows. First, the presence of copycats facilitates quality signaling by lowering the cost of separation. Moreover, in contrast to conventional wisdom, both high‐ and low‐type creators may engage in signaling: High types tend to distort reward prices, while low types strategically adjust funding goals. Second, product imitability and potential market size play key roles in the creators' signaling strategy. Creators can only effectively signal their quality when the product imitability is moderate, while the potential market size is huge. However, although the presence of copycats in general is conducive for creators to signal their quality, it diminishes creators' profits due to price competition in the potential market. Third, we evaluate three commonly used countermeasures for combating copycats: A lenient information policy by the platform, as well as a high product inimitability or a quick market entry by creators. We show that a lenient information policy may hurt creators, while improving product inimitability or expediting market entry only works under certain conditions.