The Decoy Effect

Nishant Vora & Manan Choksi | SIESCOMS

THE DECOY EFFECT
Need to sell more of a product or service? Here’s a counterintuitive idea: offer your customers a similar, but inferior, at about the same price. While it’s unlikely that they will actually buy the less attractive item, you may see a jump in sales of what you are trying to sell. That’s decoy marketing and the underlying principle effect is called the ‘decoy effect’.
The decoy effect refers to a possibility that adding a new alternative in the choice set increases the choice for one of the existing alternatives that dominates the new one It is a special case of attraction effect where the binary comparison of 2 objects, contrary to normative theory, is affected by the introduction of an asymmetrically dominated alternative to an existing choice set. ‘An alternative is asymmetric’ if it is completely dominated by atleast one candidate in the set, but not dominated by atleast one other.

For example, if there is a consideration set involving ‘portable hard disk’, consumers may generally see higher storage capacity (number of GB) and lower price as positive attributes; while some ect consumers may want a player that can store more songs, other consumers will want a player that costs less. In Consideration Set 1, two devices are available:
Consideration Set 1
Product A B
Price INR 4000 INR 3000
Storage capacity 30 GB 15 GB

In this case, some consumers will prefer A for its greater storage capacity, while others will prefer B for its lower price.
Now suppose that a new player, C, is added to the market; it is more expensive than both A and B and has more storage than B but less than A:

Consideration Set 2
Product A B C
Price INR 4000 INR 3000 INR4500
Storage capacity 30 GB 15 GB 25 GB

The addition of C—which consumers would presumably avoid, given that a lower price can be paid for a model with more storage—causes A, the non-dominated option, to be chosen more often than if only the two choices in Consideration Set 1 existed; C affects consumer preferences by acting as a basis of comparison for A and B. Because A is better than C in both respects, while B is only partially better than C, more consumers will prefer A now than did before. C is therefore a decoy whose sole purpose is to increase sales of A.
Conversely, suppose that instead of C, a player D is introduced that has less storage than both A and B, and that is more expensive than B but not as expensive as A:
Consideration Set 3
Product A B D
Price INR 4000 INR 3000 INR 3500
Storage capacity 30 GB 15 GB 10 GB

The result here is similar: consumers will not prefer D, because it is not as good as B in any respect. However, whereas C increased preference for A, D has the opposite effect, increasing preference for B.
Decoy Effect and Consumer Brand Knowledge
Studies have shown that inclusion of a decoy in the choice set significantly increases the relative preference for the target; however identifying alternatives with real brands eliminates the extent of the decoy effect when the customers possess an extensive amount of knowledge about the brands, but this is not the case when participants have relatively less knowledge of the brands.
Sometimes the target share might reduce in the decoy condition. This anomaly can be explained by the role of ‘persuasion knowledge’ in a context effect. This concept elucidates that consumers who are knowledgeable about a product category are also likely to be equipped with the substantial amount of persuasion knowledge and when an inferior decoy product has the same brand as the target product the consumers may infer a negative motive about that brand.

Higher Quality Brands Vs. Lower Quality Brands
Previous studies have demonstrated the fact that price discounts move customers from lower quality to higher quality brands more than from higher quality to lower quality brands. The consumer’s comprehension of losses, to be more unpleasant than equivalent gains are pleasant, appears to be greater for quality than price – ‘loss aversion effect’. Thus decoys may reduce the share of lower quality competitors as compared to their higher quality counterparts.
Status Quo Vs Decoy
People value an object more when they own it than when they don’t – This is the endowment effect. In one experiment, people demanded a higher price for a coffee mug that had been given to them but put a lower price on another, they did not yet own. It is a specific form, linked to ownership, of status quo bias. The endowment effect can also be seen in case of ‘Real Estate and other similar asset classes’. People tend to value a property / real estate more if they own it as compared to when they don’t. Studies show that status quo has a stronger impact on individual choice behaviour compared to a decoy choice option and a status quo is a better candidate for reference point even in a choice set containing both status quo and decoy options.
Effects of Decoys on Preference Shifts
Jongwon Park (Korea University, Seoul) and Kungkeun Kim (University of Minnesota, Minneapolis) carried out a study in 2005 to examine the conditions in which decoy effects occur. They found that when the participants reported their preferences immediately after being exposed to the information about them, the influence of decoys on preferences was attributable to the justification they provided for choosing their target over the competitor. When participants evaluated each product before making their choices, they based their preferences on these evaluations. In this case, decoys exerted their influence through their impact on the values that participants assigned to the attributes on which the evaluations were based. This influence was evident even when the decoy was clearly inferior to both the target and competitor. Moreover, it occurred under conditions in which the target and competitor were in different product categories and also when the decoy was in a completely different product domain than the target and the competitor.
Real Life Examples of the Decoy effect
The Decoy Effect explains why Apple Inc. often sells each gadget in a pricing series, such as the new iPod Touch's $229, $299, and $399 price points for different storage capacities. The customer may gladly spend $229 to get a hot media player, thinking it's a deal versus the highest-priced version. He might not even consider that he could instead buy an ‘iPhone 4’ at the lower price of $199 with more features. The $399 "decoy" has clouded his judgment. Apple Inc. thus manages to win the best of both worlds—stoking demand for products that look like bargains and the higher prices that the company earns by selling the target products by the introduction of decoys and yes, there will be some people who would end up spending $399 for a music player with slightly better technology—and Apple makes even fatter margins.


Wal-Mart’s modus operandi is to offer a price leader which they promote to get shoppers’ attention. But they don’t want them (customers) to buy that item— they want them to up-sell themselves to something more expensive (and more profitable for Wal-Mart). Good-Better-Best pricing and one can bet that the ‘Better’ item has the most attractive profit margin.
Dan Ariely, in his book ‘Predictably Irrational’ describes an experiment using magazine subscription offers. Two groups of subjects saw one or the other of these offers to subscribe to The Economist.
Offer A:
$59 - Internet Only Subscription (68 chose)
$125 - Internet and Print Subscription (32 chose)
Predicted Revenue - $8,012
Offer B:
$59 - Internet Only Subscription (16 chose)
$125 - Print Only Subscription (0 chose)
$125 - Internet and Print Subscription (84 chose)
Predicted Revenue - $11,444
The above results are startling. Both offers are the same, with the exception of including the “print only” subscription in Offer A. Despite the fact that not a single person chose that unattractive offer, its impact was dramatic - 62% more subjects chose the combined print and Internet offer, and predicted revenue jumped 43%. The print-only offer was the decoy, and served to make the combined offer look like a better value. It’s pretty clear from this experiment that` introducing the decoy made the combined offer look more attractive.
Evidence of the decoy effect through neuroimaging

MRI scans have shown that, when making a choice between only two, equally preferred options, subjects’ brain activity tends to display irritation because of the difficulty of the choice process. The presence of a third, less attractive option—or “decoy”—makes the choice process easier and relatively more pleasurable.