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Advance-purchase financing of projects with few buyers

Marco Sahm

No 118, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: I investigate a simple model of advance-purchase contracts as a mode of financing costly projects. An entrepreneur has to meet some capital requirement in order to start production and sell the related good to a limited number of potential buyers who are privately informed about their willingness to pay. I find that advance-purchase arrangements enable more costly projects to be financed than traditional funding sources. The entrepreneur uses advance-purchase surcharges as a price discrimination device. However, the discriminatory power is limited by the problem of free-riding, which is exacerbated as the number of potential buyers increases.

Keywords: pre-ordering; price discrimination; excludable public goods; monopolistic provision; crowdfunding; innovation and R&D (search for similar items in EconPapers)
JEL-codes: D42 G32 H41 L12 L26 O31 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ent, nep-mic and nep-ppm
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