Stanford Marketing Researcher Explores the “Decoy Effect”

What makes a first-time buyer select a specific packaged good brand or product from all the other products on the supermarket shelf or Webpage?

That is precisely what Stanford Professor and researcher extraordinaire Itamar Simonson recently studied.  His work is reported in the December 10, 2014 article in STANFORD BUSINESS (a free on-line newsletter) by author Louise Lee in the article, “Itamar Simonson: What Influences Shoppers.”

What Simonson studied is the so-called “decoy effect,” a marketing principle first presented in 1982 by a Duke University marketing team headed by Joel Huber.  Simonson’s effort was an attempt to expand on Huber’s work.  The key idea behind the “decoy effect” is that the customer somehow perceives a product as more valuable if that product can be compared with one or more other products on the shelf or Webpage that are perceived to be less valuable.

“Simonson says the decoy effect hinges on consumers’ thinking in relative terms, especially if price is a point of comparison,” writes Lee.  She points out that the decoy effect occurs every time you compare a product to a “reference point or see something else on sale.”

An example presented by Simonson is the purchase of a sweater for $59 that was marked down from $199.  “My reference option was $199.  The $59 price was asymmetrically dominating, and it influenced me, because I’m comparing this $59 sweater versus the same sweater for $199.”  (If a one product shows itself to be obviously superior to another, this is what researchers sat its ‘asymmetrically dominating.’)

The decoy effect is not the only factor to influence shoppers. It may not even come into play, according to Lee, since other factors also wield great influence like the nature of the product and other buyer behavior motivations.

Another illustration presented by Simonson was research done on paper shredders.  A total of 95 people participated.  They were asked to choose between two shredders.  The points of comparison were: (1) the prices and (2) the number of pages they could shred at a time.  Product A was priced at $56.95 and could shred seven sheets at a time while Product B cost $74.54 and could handle 10 sheets at a time.   Simonson reports that about 21% of the participants choose Product B.

He then added product C to the mix.  This product, priced at $84.95, was more efficient but also more expensive than product (A) . The inclusion of Product C led an increase of 74% to choose Product B.  According to Simonson’s research, “By adding a third model inferior to shredder A in some but not all respects, but inferior to shredder B in every aspect, shredder B asymmetrically dominated shredder C and saw a sales increase..

If the goal was to drive sales to product (B) than the inclusion of product (C) served ads the decoy.

According to the STANFORD BUSINESS article, the decoy effect may be hard to discern when product attributes are hard to measure – like the freshness of fruit or the picture quality on TV sets.  ‘In such situations, you may not find the effect, because in this case, people may be looking at the quality of the picture.  They are not thinking in relative terms; they’re judging the (absolute quality of) the pictures they see on TVB.’ “

The decoy effect will happen only if people perceive asymmetrical dominance where one option is clearly better than the others,” according to Simonson.  “If they don’t, it’s not going to happen.”

Clearly this is an obvious pricing and display strategy.  The retailer can steer the customer to a more profitable product by creating a decoy in the form of asymmetrical differences.  This can be accomplished by presenting an array of competitive products.