Initial Coin Offerings Versus Equity Financing Strategies Under Cournot Competition

Abstract

Enabled by blockchain progress, ICOs emerged as an alternative to traditional equity financing, with global investor reach, decentralized governance, and reduced transaction costs. However, the performance of ICOs under competitive product market conditions remains underexplored. This paper develops a game theoretic Cournot competition model to compare firms' financing and operational strategies under two benchmark scenarios, depending on whether product value is insensitive or sensitive to managerial effort. The analysis examines how cost structure, market volatility, product substitutability, and managerial risk attitude jointly affect financing choices and production decisions. To ensure research rigor, we further analyze a generalized model and conduct robustness checks by varying key parameters, confirming the stability of the equilibrium outcomes beyond the benchmark settings. The results show that optimal financing choices depend critically on market structure. Greater product substitutability intensifies competition and widens the utility gap between financing modes, strengthening the dominance of the more suitable strategy. Equity financing is more favorable for risk averse firms or those operating in low innovation, high substitutability industries such as manufacturing and utilities, due to its risk sharing and operational flexibility. In contrast, ICOs are better suited for innovation driven ventures such as DeFi and NFTs, which benefit from incentive alignment and reduced equity dilution. This study provides managerial insights into the strategic selection of financing mechanisms under competition and contributes to a deeper understanding of token financing in modern capital markets.