You only need a contract like this if there is only one party with whom you can make your deal. So the marriage example is a good one (unless you are alpha and indifferent enough to pull off: “if you won’t sign the prenup my other Fiancée will”). However the used car example is silly. You don’t need a contract stating that you will be penalized for paying more than $4000. You can just get a competing dealer to make an offer in which case this competing offer becomes your upper bound.
I realize it may seem like I’m fighting the hypothetical here, but the OP seems confused as to why these sorts of commitment devices are not widely used. The answer is that it is a big world with plenty of alternatives and competition serves the same function without risking loss.
You are right about competition serving quite a useful purpose in the real world. However the real world is not like financial markets where you have liquidity by the milli second with regard to competing offers. If competition did a great job of providing an alternative in real time, they would be no need to do the following in pretty much any negotiation
Pretend that you have lots of time and are in no hurry to close this deal with the other party or anyone else.
Pretend that you looked up and found/know of much better deals elsewhere that what the other party is offering. Alternatively claim that the competing deals you are getting are much better than they truly are.
Pretend that your “last price” is very different from your true last price.
If competition were doing an amazing job, there would be no reason to do 1-3 above.
You say above “you can just get a competing dealer to make an offer which becomes the upper bound”. If you are a person who is putting time to productive use, it would not be unreasonable to value your hour at well over $50. The question is therefore whether you can find competing offers without spending 10-20 hours which would pretty much erode your whole margin of savings.
You only need a contract like this if there is only one party with whom you can make your deal. So the marriage example is a good one (unless you are alpha and indifferent enough to pull off: “if you won’t sign the prenup my other Fiancée will”). However the used car example is silly. You don’t need a contract stating that you will be penalized for paying more than $4000. You can just get a competing dealer to make an offer in which case this competing offer becomes your upper bound.
I realize it may seem like I’m fighting the hypothetical here, but the OP seems confused as to why these sorts of commitment devices are not widely used. The answer is that it is a big world with plenty of alternatives and competition serves the same function without risking loss.
You are right about competition serving quite a useful purpose in the real world. However the real world is not like financial markets where you have liquidity by the milli second with regard to competing offers. If competition did a great job of providing an alternative in real time, they would be no need to do the following in pretty much any negotiation
Pretend that you have lots of time and are in no hurry to close this deal with the other party or anyone else.
Pretend that you looked up and found/know of much better deals elsewhere that what the other party is offering. Alternatively claim that the competing deals you are getting are much better than they truly are.
Pretend that your “last price” is very different from your true last price.
If competition were doing an amazing job, there would be no reason to do 1-3 above.
You say above “you can just get a competing dealer to make an offer which becomes the upper bound”. If you are a person who is putting time to productive use, it would not be unreasonable to value your hour at well over $50. The question is therefore whether you can find competing offers without spending 10-20 hours which would pretty much erode your whole margin of savings.