Business killing idea

Last week, there was lots written about StickK.com, a start-up allowing people to take out contracts on themselves; e.g., to suffer financial penalties if they fail to lose weight.

This week, Aaron Schiff, proposes a start-up for customers of StickK to insure themselves against failure. Now Aaron Schiff has proven himself to have generally good sense on his blog but this time his idea is truely market-killing (although I am pretty sure he realises that although Tim Harford who purchased a contract at StickK probably did not). Put simply, if the idea of StickK.com is to allow people to commit to a plan and penalty, unStickK.com destroys it as it will be always worthwhile for you to purchase a counter-contract from them after you have ‘committed’ to one from StickK.com. Moreover, the very existence of an unStickK option means that consumers will not find it worthwhile to purchase a contract from StickK.com. So neither StickK.com nor its anti- counterpart will end up making money.

Sadly, this exposes the problem with StickK.com. Even without unStickK, you will likely always have a ‘friend’ who will find it worthwhile to provide a counter-contract. StickK.com is a lovely idea but it relies on markets not working in order to work.

7 thoughts on “Business killing idea”

  1. Actually, we have thought about this. We are economists at heart. There are several reasons this won’t happen, certainly not en masse. First, adverse selection (this point was made by a sharp commenter on Aaron Schiff’s website). Second, remember the basic idea: conflict between your future and current self. Now combine these two issues: as long as you are sophisticated enough to want to restrict your future self (which is our market niche), and as long as counterparts on the non-existent unstickk.com know this, then adverse selection kickks in and this won’t unravel our contracts.

    But I agree it is a fun thought exercise. Stay tuned for the launch…

    Like

  2. We agree this is an interesting question, and here is why we do not think, in theory or in practice, this will happen:

    Combination of two reasons:

    1) Adverse selection (a sharp reader on Aaron Schiff’s site made this exact point too)
    2) Our market niche are sophisticated hyperbolic discounters.

    So combine these facts: First of all, folks will want to control their future self up until their future self is the current self. Once that happens, adverse selection kicks in: who would sign the other side of that contract??

    Fun thought exercise though! Stay tuned for the launch, coming very soon….

    Like

  3. Interesting blog and response. I remember reading the following passage about hyperbolic discounting quite recently (now who wrote this…?)

    ‘In effect, there are two related consumer problems that may come in to play. The first is self-control. Consumers would like to commit up front to certain aspects of their own future behaviour but cannot. The second is ‘naivety’ or ‘non-rational expectations’ where consumers do not realise they would like to commit up front to those things. The distinction is important as we study the response of firms to
    real consumer behaviour. Put simply, when consumers know they lack self-control they will value and demand products that give them such controls…’

    Is this the market responding to demand from consumers who know they lack self-control?

    Like

  4. Aaron’s absolutely right about a theoretical model coming on. I think you are looking at a problem of “sequential contracting.
    Easiest paper on the subject is my Econ Letters 1993 paper “The principal-agent problem when the agent has access to ouside markets”. I think the first appearance is Bizer and DeMarzo 1992 JPE “Sequential Banking”. The basic point is easy to slow in a two-state diagram. Bottom line: adverse selection does NOT undercut the problem of purchasing “second-hand” insurance.

    Josh, in case my name sounds familiar, yep, it’s the same guy who was at AGSM (and at ANU for 1994). Been in industry since 2004. Nice blog!

    Like

  5. I’m currently doing a diet under a similar plan, but with a difference: a friend is holding a check for $250 made out to the Guiliani campaign. If I don’t succeed, the check gets mailed. Not only do I lose my money, but it will be public record that I supported him.

    Substitute whatever politician provides the best motivation for you.

    Note that trying to “escape the contract” by donating to the “opposite” candidate probably does not work very well.

    Like

Comments are closed.

%d bloggers like this: