Decoy Effect in Online Marketplace:

How it affects Consumer in Purchasing Apple product

Salma Billah Attaqy

Department of Global Innovation Studies, Toyo University

Research Methods12

Fiona Sussan, Ph.D.

August 4, 2022
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Abstract

The journey of every purchase process is unique, it involves many internal and

external aspects even far before the progress happen, and might be different for every person.

Nevertheless, researcher can still learn all this progress and make an effective marketing

strategy. The purpose of this paper is to see one of that strategy- the decoy effect. This paper

seeks to answer the research question, how decoy effect influences consumer when it comes

to purchasing in the online market places? Is there any difference between decoy effect in

online and offline marketplace? And is there a time that this effect do not works anymore?

Furthermore, Apple brand selected as research subject because this brand is easily recognized

and they using the decoy effect strategy in marketing their product.

Keywords: Decoy Effect, online marketplace, Apple Inc. , Consumer behavior

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Decoy Effect in Online Marketplace: How it affects Consumer in Purchasing Apple

product

Most of people probably have been going to a coffee shop, look at the menu then

figure out that usually there will be three different sizes of cup; large, medium and small.

Commonly, when we compare the price between the smallest and the largest cup, there will

be huge differences. Then, the middle option- which is the medium size with a small price

different with the large and make the large option seems as a big deal.

This phenomenon also can be found when we purchasing Apple product. If we want

to purchase a 16-inch MacBook pro, there are several options that the company offered. The

first option is $2499 with 16GB unified memory and 512GB SSD storage, and the second

option with the same unified memory and 1TB SSD storage at $2699 (Apple, 2022). It is

actually not pretty hard to compare between the first and the second options since there are

not huge price differential. However, in this scenario the expected preference will be fifty-

fifty (or even more) people going for the cheaper laptop. However, the company will evoke

the consumer to spend more money on their product. Thus, they give the last option (decoy)

which is 32GB unified memory with the same storage as the second option for $3499. As

result, this makes the second option look more preferable, since with only $200 addition,

consumer can get the same storage capacity with the third option.

This pricing concept is called the Decoy effect or also known as Asymmetrically

Dominated Alternative when the company put the third option with huge different thus the

target product will seems as a big deal by the consumer.

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I. Literature Review

The beginning of Decoy Effect concept

In the marketing world, the decoy effect is a phenomenon where consumers tend to

have a specific change in preference between two options (A and B), when the third

asymmetrically dominated option is present (C). An option is asymmetrically dominated

when it is inferior in all respects to one option (say A); however, in comparison to the other

option (say B), it is inferior in some respects and superior in other (Nicolau-Gonzalbez,

2015). This effect is one of the behavioral economics concept of Nudge Theory which also

included as one of cognitive bias that can help company to make the consumer feel that it is

the “right” decision.

Decoys lead to violations in the regularity hypothesis of classical choice theory (Luce,

1959), triggering a number of different effects (e.g., attraction, background contrast, and

compromise; Choplin & Hummel, 2005; Dhar & Glazer, 1996; Huber, Payne, & Puto, 1982;

Prashant & Sivakumar, 2002; Ratneshwar, Shocker, & Stewart, 1987; Sen, 1998; Sheng,

Parker, & Nakamoto, 2005).

Then come to the question who and when this phenomenon established. The decoy

effect probably has been applicated in the business and marketing world unconsciously since

several decades ago, however the first paper that discussed and introduced the Decoy effect

was a paper by Marketing Professor from Durham, named Joel Huber. Associated with his

colleagues, John W. Payne, and Christopher Puto, they conducted a research regarding an

Asymmetrically Dominated Alternative in 1982.

How decoy effect works

The subject of experiments that conducted by Professor Joel Huber and his colleagues

are one hundred and fifty-three graduate and undergraduate business students. The students
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are required to make choice from six products with different categories that were given. For

each category, there were three products provided, the target, the competitor, and the decoy

product. The target and the competitor are positioned in the place that will not dominates

each other- each has a dimension on which it is superior. The last product (the decoy) is a

stimulus anywhere in the shaded region of figure one (typically closer to the target) where it

is dominated by the target but not the competitor. The aims of the decoy product is to

increases the proportion of choices in favour and to increases the percent of choices to the

target. In the other word, the effect of the decoy or dominated alternative is to attract attention

for the more profitable product than to generate direct sales.

Figure 1

Placement of Asymmetrically Dominated Decoy

The perceptual framing of the decision problem is one of the reason why positioned

the decoy product near to the target. Furthermore, figure 2 shows four strategies of placing

the decoy product, (1) increasing the range of the dimension on which the target is the

weakest, R (2) strongly increasing the range,R* (3) increasing the frequency of the dimension
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on which the target is superior F, and (4) combining both range and a frequency strategy RF

(Huber et al., 1982) .It is hypothesized that a fixed difference in the dimension can be

decreased by increasing the range of the dimension which the competitor is superior.

Figure 2

Placement of Asymmetrically Dominated Decoy

Description: R- moderate range increasing; R* - extreme range increasing; F 0 frequency increasing; RF – range and frequency increasing

First, by adding another price level, more attention may be drawn to the dimension

(Currim et al., 1981). Second, adding a decoy might spread the psychological distance of a

lower price, granting the target an advantage over its competitors. Adding such a decoy

would appear to lower the variance along the price dimension, making the standard

differences greater. This result is comparable to Parducci's (1974) finding that adding

alternatives within the range of others tends to spread out their distances on subjects.

  Furthermore, the combination range-frequency strategy, RF, adds a decoy that

simultaneously increases the range of the dimension on which the target is inferior and

increases the frequency on which is superior. Although such strategy should combine the

biasing powers of both, the biasing effect may be attenuated with such a strategy.
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  As a final example, simply assuming that the respondent is popular could result in a

reweighting in favor of the target. An individual may believe that all the choices are popular

and viable before being made aware of the dominance relations. A decoy who appears to be

popular may raise the target's vote if the subject wishes to make a choice that others will

make. When the decoy is initially paired with a competitor, it eliminates the competitor,

increasing the likelihood of the target being selected. It may be more likely for the

simplifying decision maker to decide between the target and the decoy than to choose

between either decision involving the competitor, leaving the target as an option.

From this experiment, we can see that even since beginning, Decoy products does not

meant to be selected. When we have a decoy which is slightly worse than the target, it is not

only make the target looks more favourable than the decoy, but also more favourable than all

of its competitors.

Apple brand in Online Market Place

The Decoy effects appear to be robust as they can be found in a variety of product

classes ranging from restaurants to light bulbs and occur regardless of whether choice sets are

manipulated between subjects (Heath and Chatterjee, 1995). For both theory and practices,

decoy effect plays important role as they involve various perceptual and decision-making

processes. In this paper, the writer will discuss a decoy effect that can be found when

purchasing Apple product in the online marketplace.

Online marketplace is a type of market that using the Internet of Things (IoT), the

network of physical objects—“things”—that are embedded with sensors, software, and other

technologies for the purpose of connecting and exchanging data with other devices and

systems over the internet. Since the fourth industrial revolution or also known as Industry 4.0
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the number of online marketplace has exploded. The advantages and simplicity of online

marketplace is very obvious and can be felt by both consumer and the company.

Online marketplace offer real convenience users access suppliers’ inventory

electronically and the marketplace doesn’t have to own it before offering it to consumers, all

the products being sold by suppliers are available to consumers and there is real-time

information about the products being presented to consumers on an online marketplace’s site

or app. It’s a much broader assortment than any store could offer (Kastenbaum, 2017). With

just only sitting inside the house, and using our thumb only, we can purchase goods. It is

simple, time saving, and easy. The consumer is not required to go anywhere.

In addition to that, the online marketplace is also giving more advantages when it

comes to purchasing an electronic goods, such as Apple product. Since electronic goods

usually need more time to compare and decide, there are a lot of variables such as the storage,

the quality, the color, the size, and the price. Online marketplace enable consumer to see the

review of product since it will be used for a long term, a careful decision is needed.

The consumer can purchase Apple product through their website apple.com, or at an

Apple store. The Apple Store is retail stores that owned and operated by the company itself,

and can be found in more than twenty countries including Europe, Asia, and America. The

United States is the country that Apple choose the most as their shop’s location with more

than two hundred stores. Consumer can find various apple products, including iPhone, Apple

TV, Apple Watch, iPad tablet, software, and also accessories from the third party. The Apple

store usually can be found inside a department store or a shopping mall, however the

company choose a high-profile locations to meet the target consumer. Usually, the consumer

will do research first and check the price in their online store, and consumer can choose their

preferences whether to pick the items in the offline store, or delivered it to their residence.
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The decoy effect in Apple Product

As mentioned in the introduction section, Apple company use the decoy effect for

their product such as their MacBook by offering three options for their 16-inch laptop with

different range of price. Another example is to choose two hypothetical iPhones using two

variables with the speed and the battery life.

Table 1

iPhone Set Comparison

Model Speed Batery Life

iPhone 1 (Target) 50 10

iPhone 2 (Competitor) 35 15

The set above it is difficult to make a decision since the target and the competitor is in

a symmetric relationshop between speed and batery life. As shown in the table graph below.

Figure 3

Without Decoy
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Table 2

iPhone Set Comparison with The Decoy Product

Model Speed Batery Life

iPhone 1 (Target) 50 10

iPhone 2 (Competitor) 35 15

iPhone 3 (the Decoy) 50 8

Then, after the third product is added, the decoy make the choice become bias and

reframe the consumer’s preference. The decoy will make the Target product become more

preferable than the competitor when we focus to the battery life.

Figure 4

Decoy product placement

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Then, the question regarding does this effect still in the online marketplace?

Remembering that in Online marketplace, the consumer tend to have more time to make a

decision compared with purchasing in the offline store. The presence of the sales will also

increase the probability the consumer changing their decision to finally purchase the more

beneficiary product.

The writer use the example of Decoy pricing that used by an Online diamond retailer

conducted by Chunhua Wu and Koray Cosguner. The reason of this example being chosen is

(1) Diamond is one of Hedonic goods which quite similar with the Apple brand, (2) This

experiment took Online marketplace that is in line with the purpose of this paper.

They conducted an empirically test and quantify the Decoy Effect in the diamond

sales of a leading online jewelry retailer. They also develop a diamond-level proportional

hazard framework by jointly modeling market-level decoy–dominant detection probabilities

and the boost in sales upon detection of dominants. The result shows that decoy–dominant

detection probabilities are low (11%–25%) in the diamond market; however, upon detection,

the Decoy Effect increases dominant diamonds’ sale hazards significantly (1.8–3.2 times). In

terms of the managerial significance, we find that the Decoy Effect substantially increases the

diamond retailer’s gross profit by 14.3% (Wu & Cosguner, 2020).

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II. Conceptual Framework

Pressure
(Time, External factor)

H1 H2
Price Fairness Preference

H3

Cognition

There are three hypotheses that impact customers’ preferences when it comes to

purchasing the product in which a decoy product is present. The first is price fairness, the

decoy effect makes the price not fair (asymmetric) and it makes the target product seem more

dominant. The second hypothesis is external pressure and time pressure or in other words,

time limit. External pressure such as the presence of a salesperson, and companion opinion

can also impact and even change customer preferences. In the marketplace when the

salesperson is not there, and the time to decide is limitless will more likely impact the

customer's decision. The last hypothesis is the customer’s cognition and their ability to make

decisions cognitively.

III. Experiment Design

In order to learn how the decoy effect works in the online marketplace, the writer

conducted a survey on both online and offline platforms. The situation, the number of survey

targets, and the choices are the same. However, both simulations were conducted for finding

possibilities of a difference in the impact of the decoy effect.

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For the online survey, Google Form is used. Google form is part of Google’s suite of

web-based apps and is easy to use without any charge. The sample in this experiment is Toyo

University students. From the writer’s observation, Apple product is widely used by them.

Thus the sample has personal experiences that affect cognition and decision-making progress

in filling the survey.

The writer provides a store simulation, that offers a sample of three MacBook options

with a different range of prices. Asymmetrical alternatives increase the choice proportion in

favor of the target. The target and the decoy are likely to be selected easier than either option

involving the competitor, leaving the target as the choice (Huber et al., 1982). In addition to

that, the addition of another price level can also increase awareness of the dimension (Currim

et al., 1981).

Table 1 below shows an overview of the experiment design. In this simulation, the

writer used the first hypothesis that impacts customers’ preferences which is the price

fairness.

Table 1

Choice sets using different price strategies

Price Features

Range Increasing (R)

Target 270,000 円 Touch Bar and Touch ID,
2.0GHz Processor, 512GB
Storage
Competitor 200,500 円 2.0GHz Processor, 256GB
Storage
Decoy 250,000 円 Touch Bar and Touch ID,
2.9GHz Processor, 256GB
Storage
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Extreme Range Increasing (R*)

Target 200,000 円 2.0GHz Processor, 256GB
Storage
Competitor 270,000 円 Touch Bar and Touch ID,
2.0GHz Processor, 512GB
Storage
Decoy 200,000 円 1.9 GHz Processor, 256GB
Storage

Frequency Increasing (F)

Target 200,000 円 2.0GHz Processor, 256GB
Storage
Competitor 270,000 円 Touch Bar and Touch ID,
2.0GHz Processor, 512GB
Storage
Decoy 220,000 円 2.0 GHz Processor, 256GB
Storage
Range-frequency (RF)
Target 200,000 円 2.0GHz Processor, 256GB
Storage
Competitor 270,000 円 1.9 GHz Processor, 128GB
Storage
Decoy 200,000 円 Touch Bar and Touch ID,
2.0GHz Processor, 512GB
Storage

The survey was divided into 4 sections with different strategies of the price range. As

it mentioned before in the previous part, the first set (R)is where we increase the range of the

dimension on which the target is the weakest. The second set (R*) is when we strongly

increase the range, the third (F) is when we increase the frequency of the dimension on which

the target is superior, and the last set is combining both range and a frequency strategy RF

(Huber et al., 1982).

Simonson (1989) argues that individuals justify their choices when faced with

uncertainty, especially when they are worried about external evaluation of their decisions: the
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target may be more desirable because it combines desirable characteristics from the other

choices; the target may be considered a "compromise".

There is a connection between this scenario and the composition of our minds and

brains. The system constantly assesses items in relation to other components. Consumers are

influenced by this situation to evaluate not only relationships, but anything that can be

compared. Overall, consumers tend to make decisions based on their personal needs when

there are two options available. Giving the consumer a third option, however, could influence

them to choose the more expensive option.

In addition to that, the writer used the same brand for competitor, target, and decoy

products thus it will provide an easy choice for the target. The currency that is used in the

target is in Japanese Yen (the conversion on August 4 2022 1 Japanese Yen equal to 0,0075

United States Dollar) since the target survey is Toyo University students who live and is

located in Tokyo, Japan thus it will make it more relatable and easier to imagine and build an

environment similar to a real online marketplace.

IV. Result and Discussion

A. Experiment Result

The result of this experiment, unfortunately, cannot be shown due to the limit of the

time thus enabling the writer to conduct the survey. The result of this survey is designed to

compare the effectiveness of the decoy effect in the online and offline marketplace. The

measurement is by seeing the percentage of the target product being chosen. In addition to
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that, the experiment tries to seek the proven hypothesis of the decoy effect (price fairness,

pressure, and cognition).

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B. Discussion

The decoy effect is manipulating the consumer by experiencing choice overload thus they

will simplify the decision-making progress to determine the best value for money. In the

online marketplace. Even though it seems like we tend to avoid the decoy if we know that the

product is just a decoy (in this case the Apple product), the chance for us to fall for the decoy

effect is still high. Decoy obliges us to make irrational decisions even though we try to think.

The more rational you think you are, the more likely you are to make an irrational decision.

That’s because when we are faced with making a choice, our primary goal is not to make a

correct decision.

The writer thinks the gap in this study is there are no specific experiments that show

the impact of marketplace location (online or offline) on the decoy effect.

In the online marketplace for Apple brand purchases, the writer has not found any

specific research paper that discussed it specifically. Thus, the writer uses the online diamond

retailer as the closest similar approach which shows that in the online market, the decoy

effect is still working. However, it is still needed to do an experiment that compares offline

and online side by side thus the difference will be more obvious. In addition to that, the

placement of the decoy product (in the dimension) is also important and needs to be decided

wisely. By choosing the right decoy placement strategy, the percentage of the target product

being chosen will be higher.

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