As I expressed, I’m not sold on GroupOn as a business in its current form, and expect it to flame out on a massive scale. However, I do think the company will be known for one key contribution: it’s lock-in mechanism. GroupOn’s deals don’t go into effect until a sufficient number of subscribers opt into the deal. At this point, the lock-in serves little function for GroupOn; all its deals reach the threshold, and I doubt anything would change if it disappeared. But the lock-in idea is a powerful tool for collective action and has powerful implications across a wide range of businesses.
For instance, combine a lock-in mechanism with real estate. Part of what drives a person’s decision to live in a particular building/neighborhood/city is whether other individuals are also going to move there. Right now, it’s hard to know. But with a lock-in mechanism, a building owner/neighborhood real-estate association/municipal government could offer individuals a way to commit to moving to a certain location only if enough other people do so.
As an example, Detroit is not an attractive destination for people in their twenties. There are many reasons for this, but one key reason is that Detroit is not an attractive destination for people in their twenties. If someone in their twenties knew that a large number of people in their twenties were about to move to Detroit, it would become a much more appealing destination. So suppose the city of Detroit, working with real-estate owners and developers, offers a GroupOn-like deal to non-residents in their twenties, allowing them to buy or rent units in Detroit at a certain low price (Detroit real estate is extremely cheap right now), but the deal only kicks in if 100,000 people sign up. If fewer people than that sign up, no one is locked in.
But wait, there’s more. Another reason Detroit may be an undesirable location is because it lacks nice stores/restaurants and good jobs. The reason it lacks these is that store-owners and employers don’t want to set up shop in Detroit, because there aren’t any good customers or employees there. Instead, businesses head to a city like Chicago, even thoughts rents are higher, because that’s where the young people are. This is, again, a collective-action problem, and one that can be addressed through a lock-in mechanism. Expand the real-estate GroupOn, such that it only kicks in if a) 100,000 people in their twenties move there, b) 300 major employers agree to move into town and higher from the 100,000, and c) 1,000 store owners decide to open up shop. Residents, employers, and store owners alike can sign up for the deal, but it only goes into effect if all three conditions are met within a certain date. Otherwise, everyone’s off the hook.
So who will start this business? I don’t know…maybe GroupOn?