The Decoy Effect or the Asymmetric Dominance Effect is a cognitive bias in which consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated.
Simply put when there is a third strategically important choice, aka the decoy, then the consumer is more likely to choose the more expensive of the other two options.
The Decoy Effect
An option is asymmetrically dominated when it is inferior in all respects to one option. However, in comparison to the other option, it is inferior in some respects and superior in others. In other words, it is completely dominated by (i.e., inferior to) one option and only partially dominated by the other. When the asymmetrically dominated option is present, a higher percentage of consumers will prefer the dominating option than when the asymmetrically dominated option is absent. The asymmetrically dominated option is therefore a decoy serving to increase preference for the dominating option.
Decoy Effect Examples
For example, if we consider a set of MP3 players, consumers will generally see higher storage capacity (number of GB) and lower price as positive attributes. While some 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:
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:
The addition of C, which consumers would presumably avoid, given that they can pay for a model with a lower price and more storage. This difference causes A, the dominating option, to be chosen more often than if only the two choices in Consideration Set 1 existed. Option 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. Thus, we have a decoy effect.
Conversely, suppose that instead of C, we introduce player D that has less storage than both A and B, and that is more expensive than B but not as expensive as A:
The result here is similar: consumers will not prefer D because it is not as good as B in any way. However, whereas C increased preference for A, D has the opposite effect, increasing preference for B. Thus, we have a decoy effect.
See more examples of the Decoy Effect here.