Network Externalities in Collaborative Consumption: Theory, Experiment, and Empirical Investigation of Crowdfunding
Crowdfunding is an internet fundraising mechanism for soliciting capital from the crowd to support entrepreneurial ventures. Entrepreneurs set a funding target and deadline. Investors independently decide whether to contribute, but the total of their contributions determine whether the project will be successfully funded. When deciding whether to participate, investors may estimate a project's chance of funding success not only from the amount of funding the project has attained, but also from the timing that this number was achieved. To illustrate this, suppose there are two projects that are identical except that one reaches 50% of its funding goal in 10 days whereas the other reaches this percentage in 20 days (suppose the funding period for both projects is 30 days) The two projects have attracted the same amount of funding, however, the temporal information (10 days vs. 20 days) may also provide essential information for investors to evaluate a project's prospect and its chance of reaching the preset funding target by the pre set deadline. The temporal dynamics of network externalities have not been well explored in the literature. Empirical results show that failing to account for time effects may lead to misleading estimation of network externalities.This paper investigates investors' contribution behaviors in the presence of network externalities and a target/deadline. The empirical model captures investors' expectation on the prospect of a project based on its current funding status and time progress. Model estimation shows that investors are more likely to back a project that has already reached a large fraction of its funding goal (positive network externalities) For the same amount of achieved funding, the backing propensity declines over time (negative time effects) These two opposing forces give rise to a critical mass of funding the project must attain on time to achieve successful funding. Interestingly, this critical mass changes over the funding period. Simulation studies show that projects may fail to attain the critical mass due to unfavorable shocks at the early stage of the funding cycle. We provide actionable promotion strategies for entrepreneurs to dynamically manage their crowdfunding campaign. Our model and results shed light on the temporal dynamics of network externalities in collaborative consumption with a target and deadline.