The decoy effect or asymmetric dominance effect is the phenomenon whereby consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated.
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.
Example of the Decoy Effect
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 a lower price can be paid for a model with more storage. This 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, 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:
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.