Understanding the Decoy Effect in Consumer Choice

The decoy effect is a fascinating phenomenon in consumer psychology where adding a third option can significantly influence a customer’s choice between two initial options. Let’s explore how this cognitive bias works through the lens of mobile phone plans.

The diagram above illustrates the three different decoy effects on a quality-price grid. The competitor and target products are fixed points, with three distinct regions where placing a decoy product can influence consumer choice

The Basic Setup: Target vs Competitor

	Target	Competitor
Price	30€	20€
# GB	10	6

Asymmetric dominance

This occurs when we introduce a decoy that’s clearly inferior to our target product:

	Target	Competitor	Decoy
Price	30€	20€	35€
# GB	10	6	9

Here, the decoy is both more expensive and offers less data than our target, making the target appear as a more rational choice.

Attraction effect

This subtle approach positions the decoy slightly below the target in both price and quality:

	Target	Competitor	Decoy
Price	30€	20€	28€
# GB	10	6	7

The decoy’s presence makes the target’s premium features more attractive, despite its higher price point.

Compromise effect

This strategy positions the target as the “middle ground” option:

	Target	Competitor	Decoy
Price	30€	20€	50€
# GB	10	6	12

By introducing a high-priced option, the target appears as a reasonable compromise between price and features.

Acknowledgement: Based on lecture notes from the winter term 2017/18 lecture Digital Communities at TU Berlin.