The Decoy Effect: A Blessing and A Curse

Politics and Economics

Photograph: John Lau

The “Decoy Effect” is best defined as a phenomenon whereby consumer preferences are affected when choosing between two alternative products by a third alternative known as the “decoy”. It may also be referred to as the “attrition effect” or the “asymmetric dominance effect”.

It is used as a way of making consumers more inclined to choose the more costly choice of the original two by making it seem as though it is of better value for money. Consumers are not meant to purchase this third option; its sole purpose is to influence consumers to purchase the goods above the equilibrium price and acquire higher profits for producers.

The effect was first referred to in a paper called “Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis” written by Joel Huber, John Payne, and Christopher Puto. The paper explains how the “profitability of a product line can be increased by adding a (dominated) alternative that virtually no one ever chooses.” This contradicts rational human behaviour as it manipulates individual decision making without improving the price or quality of the product being consumed, potentially causing the individual to make a decision that does not maximise their own utility. This can, therefore, create market failure as the good or service will likely be over-consumed at its price and the allocation of resources within the economy will not be Pareto efficient.

To this end, the Decoy Effect has helped to destroy the traditional economic view that humans are rational and has opened the eyes of many modern behavioural economists who have recognised its power and utilised it in order to increase profits for their employers. For example, in the book “Predictably Irrational”, the author Dan Ariely presents the example of how The Economist had three offers of different subscriptions that could be bought. The first of which was just the online subscription at a price of $59, the second was just the printed copy which would be delivered for $125, and the final option was both of the previous offers, but it also cost $125. Ariely conducted a study of his students to exhibit the effects of the Decoy Effect. Out of the 100 participants, 16 chose only the online edition, nobody chose only print, and 84 students opted for the offer of both. To test the reliability of his results and rule out any additional factors at play, he removed the only print option and gave the two remaining options to 100 additional people. This time the majority chose only the online version and just 32 chose the option for both.

This reaps inflated profits for producers; however, it comes at a societal cost. As the consumption of paper copies increases, negative externalities of production increase, owing to the Decoy Effect. This increase in the production of paper copies requires more consumption of paper, adding only to the detrimental effects of deforestation, as well as additional consumption of fuel to deliver the copies door to door, polluting the atmosphere with greenhouse gases and fostering global warming. These problems extend also to the creation of negative externalities in consumption as the Decoy Effect is often used to incentivise people to purchase demerit goods such as fast foods, in larger quantities (e.g. large cokes and large popcorn buckets). Overconsumption of fast foods promotes obesity in our society and puts a greater strain on our National Health Service.

The Decoy Effect can be found almost everywhere in retail, and acts to show that, controversial to the beliefs of classical economists, humans are not rational and can be manipulated by factors independent of price and quality. It increases profits for producers at the downfall of consumers, and at the greatest cost to society. As discussed, it promotes the overconsumption of demerit goods, creating negative externalities in both production and consumption and is thus a cause of market failure in our economy. It is hence in the best interest of the government to regulate and reduce the usage of such tactics in promoting undesirable products; however, such a reform would surely be the source of great controversy.