Financing as a Marketing Strategy

T paper investigates the issues concerning a film producer that finances production costs not only by the conventional funding from an institutional investor, but also by “Internet funding,” financing through the Internet from so-called netizen investors. In Internet funding, netizen investors engage in word-of-mouth activities. Assuming that information asymmetry exists between the producer and investors, we investigate how the Internet funding size varies with the word-of-mouth effect, the monitoring effect of the institutional investor, and the bargaining power of the producer over investors. When the producer has no bargaining power, the Internet funding size is determined by balancing the word-of-mouth effect with the monitoring effect by the institutional investment. If there is no word-of-mouth effect, there may be no Internet funding, because netizen investors interpret Internet funding as an indicator of a negative profit. When the producer has high bargaining power, full Internet funding is possible if the information asymmetry of the film quality is resolved. We discuss how information asymmetry can be resolved by the monitoring of the film quality, the producer’s reputation, or the insurance on investment returns. Our model helps to capture several interesting aspects of Internet funding in the Korean film industry.