Decoy effect (also called Asymmetric dominance effect) is a marketing & pricing strategy whereby consumers will tend to have a specific Change in Preference between 2 Options when also presented with a 3rd option that is asymmetrically dominated.
Assume that there are 2 media-players; of a given company ABC; present in the market: X & Y, with prices $40 & $30 respectively and storage 30GB & 20GB respectively. In this case, some consumers will prefer A for its greater storage capacity, while others will prefer B for its lower price.
In this case, Z is therefore a DECOY whose sole purpose is to increase sales of Y.
Real-life case-study:
Decoy-effect explains why Apple 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.
You may gladly spend $229 to get a hot media player, thinking it's a deal compared with the highest-priced version and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features.
The $399 "decoy" has clouded your judgment.
Apple wins the best of both worlds - stoking demand for products that look like bargains and for all the decoys it sells at much higher prices.
Yes, some people will spend $399 for a music player with slightly better technology - and Apple makes even fatter margins.
Example:
Assume that there are 2 media-players; of a given company ABC; present in the market: X & Y, with prices $40 & $30 respectively and storage 30GB & 20GB respectively. In this case, some consumers will prefer A for its greater storage capacity, while others will prefer B for its lower price.
Now assume a new player Z in launched; by ABC; in the market.
Z's price is $50 & storage is 25GB.
Because X is better than Z in both price & storage, while Y is only better than Z in pricing, more consumers will prefer X now than did before.
Because X is better than Z in both price & storage, while Y is only better than Z in pricing, more consumers will prefer X now than did before.
In this case, Z is therefore a DECOY whose sole purpose is to increase sales of X.
To understand this concept better, assume that Z's price is $35 & storage of 15GB.
Now, because Y is better than Z in both price & storage, while X is only better than Z in storage, more consumers will prefer Y now than did before.
Real-life case-study:
Decoy-effect explains why Apple 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.
You may gladly spend $229 to get a hot media player, thinking it's a deal compared with the highest-priced version and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features.
The $399 "decoy" has clouded your judgment.
Apple wins the best of both worlds - stoking demand for products that look like bargains and for all the decoys it sells at much higher prices.
Yes, some people will spend $399 for a music player with slightly better technology - and Apple makes even fatter margins.
Source:
theatlantic.com/technology/archive/2010/10/apples-brilliant-decoy-pricing-game/64104/
https://en.wikipedia.org/wiki/Decoy_effect
https://en.wikipedia.org/wiki/Decoy_effect
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