Discounted: The effect of founder race on the price of new products

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AuthorsPeter Younkin, Venkat Kuppuswamy

Publication: Journal of Business Venturing, Forthcoming

Abstract

Understanding why minorities are persistently underrepresented in entrepreneurship is a question of both academic and popular interest. We propose that one underrecognized explanation for this phenoma is that consumers discount the value of products by minority founders, placing a significant constraint upon the financial prospects of their firms. In essence, the object of this study is to introduce the idea that consumer bias with respect to product price is an underexplored source of variation in the performance of new ventures.

Prior research on bias in entrepreneurship has focused largely on the question of pre-entry constraints. The dearth of black students in STEM majors or in the ranks of startup employees are considered important factors that constrain the number of minority candidates prepared to transition into entrepreneurship. More frequently, scholars have examined the challenge minorities face persuading banks or professional investors to support their venture. While these are indisputably significant concerns, we propose that there are also significant challenges to be considered post-entry. In particular, we draw upon Becker's (1957) theory of consumer discrimination to hypothesize that one factor contributing to the underperformance of minority ventures is bias among prospective consumers. This theory suggests that consumers may be less willing to transact with minority founders, reducing demand for their products, and the potential return on investment.

In this article, we extend the theory of consumer bias to explain entrepreneurial outcomes. Specifically, we consider whether minority founders are subject to price discounting, where prospective consumers use a founder's ethnicity to determine the price they would pay for a product in a way that negatively affects minority founders. We use three experiments simulating sales on a crowdfunding platform to provide evidence that prospective consumers anticipate lower prices for products from black founders, after holding important founder and product characteristics constant. Importantly, we also show that this discounting effect is strongly influenced by the degree of uncertainty around either the product or the founder, and therefore the penalty can be reduced through founder proactivity.

A key contribution of our article is in identifying a second source of bias faced by minority founders: consumer bias with respect to the price of their products. However, it is important that minority founders be aware that we also find that consumer bias is largely motivated by uncertainty around the founder's “fitness” or a typical price for the product. As a result, we show that founders can reduce the degree of bias (and increase their revenue) if they signal to the consumers how hard they work and that their product is intended for a wide audience (and not solely for other minorities), or if they operate in markets with relatively fixed prices. These findings suggest that crowdfunding can offer minority founders a means to experience a more level playing field, but that to do so they must proactively address consumer concerns.

Read article: Journal of Business Venturing