Optimal Quality Strategy and Matching Service on Crowdfunding Platforms

Wenqing Wu, Xuan Huang, Yue Li, Chien-Chi Chu
2018 Sustainability  
This paper develops a crowdfunding platform model incorporating quality and a matching service from the perspective of a two-sided market. It aims to explore the impact of different factors on the optimal quality threshold and matching service in a context of crowdfunding from the perspective of a two-sided market. We discuss the impact of different factors on the optimal quality threshold and matching service. Two important influential factors are under consideration, simultaneously. One is
more » ... quality threshold of admission and the other is the matching efficiency on crowdfunding platforms. This paper develops a two-sided market model incorporating quality, a matching service, and the characters of crowdfunding campaigns. After attempting to solve the model by derivative method, this paper identifies the mechanism of how the parameters influence the optimal quality threshold and matching service. Additionally, it compares the platform profits in scenarios with and without an exclusion policy. The results demonstrate that excluding low-quality projects is profitable when funder preference for project quality is substantial enough. Crowdfunding platform managers would be unwise to admit the quality threshold of the crowdfunding project and charge entrance fees when the parameter of funder preference for project quality is small. 2 of 17 unique features. Crowdfunding platforms follow different investment models. The "All-or-Nothing" (AON) model implies that the fundraiser only receives the pledged amount if the target investment is reached. If the goal is not reached, the funds are returned to funders [3] . Most of the crowdfunding platforms choose this model, including Kickstarter. In other words, when a crowdfunding platform chooses the AON model, its crowdfunding campaigns have a possibility of success. The success rate also influences platform profits directly. A high success rate means a higher expected revenue for crowdfunding platforms. Project quality is linked to crowdfunding success, and projects with a higher quality level are more likely to be funded [3] . Therefore, crowdfunding platform managers will conduct due diligence regarding the project and restrict access to the platform for some fundraisers. Non-price governance rules are important parts of many real-world two-sided platforms, such as Microsoft, Sony, and Apple. All of these companies restrict access to some game developers and even exclude certain developers. Excluding some low-quality projects is one of the most common two-sided platform market rules for increasing the average quality of projects. Because a project requires more than one funder to reach its funding target, crowdfunding platforms also provide a one-to-many matching service for the two sides of a market. A proper match can enhance the performance of an organization [4] . A crowdfunding platform has a large number of campaigns, and good matching technology not only helps funders to find campaigns that better meet their needs but also promotes campaigns to help them reach their targeted funds. A high-level matching service makes the arrangement of funders and fundraisers more efficient, but it also raises the cost. A matching service is an important competency for crowdfunding platform markets. Most research to date into two-sided markets focuses on two-sided pricing strategies [5-7]. Some recent papers study non-price strategies, including quality strategy and matching service. Damiano and Li [8] indicate the effect of quality on two-sided markets. Hagiu [9] analyzes the exclusion strategy when considering the preference for quality. Many articles mention that a crowdfunding platform is a typical two-sided market; however, few studies examine crowdfunding platforms from the perspective of a two-sided market. To the best of my knowledge, most papers on crowdfunding platforms study the determinants of funders' investment intentions, the fraudulent behavior of founders, donor behavior in crowdfunding for non-profits, and some empirical research [10] [11] [12] [13] . In addition, some scholars study the exclusion policy in two-sided markets, but no articles study the choice between quality and quantity on the crowdfunding platform. This paper focuses on project quality and the matching service on crowdfunding platforms from the perspective of a two-sided market. Project quality is an important factor for funders participating in crowdfunding campaigns. A matching service, the matching technology of crowdfunding platforms, is also part of the first-party content. Crowdfunding platforms can charge higher fees resulting from an increasing number of successful projects. However, if the exclusion strategy and matching service are costly, platform profits will be damaged. Therefore, platform managers need to identify the optimal quality threshold of admission and the optimal matching service level to ensure a profit-maximizing crowdfunding platform. Our model builds on Hagiu's work but extends it in three ways. Hagiu's model does not allow payments from agents on one side to the other side. Our model incorporates payments from fundraisers to funders. A matching service can impact funder utility and platform profits. Our model also includes the matching service of crowdfunding platforms, which is not reflected in Hagiu's model. Moreover, our model assumes a specific distribution for project quality, which is not presented in Hagiu's work. Although some scholars study the quality threshold in two-sided markets and farmers' markets, little theoretical work has been done on the crowdfunding platform market. Additionally, this paper studies the quality strategy and matching service on crowdfunding platforms. It contributes to the literature by extending the theory of two-sided markets to crowdfunding platform markets. Hagiu's work builds a general model studying the choice of exclusion for a two-sided platform to maximize profits. However, the model does not incorporate the possibility of a campaign. Zheng and Kaiser [14] study farmers' markets, but they do not consider the possibility of platform investment. We provide an Sustainability 2018, 10, 1053 3 of 17
doi:10.3390/su10041053 fatcat:a4pej7oshzgmnni7vio65sld3u