Application Exercise 5p: Media Analysis [The decoy effect]
- The decoy effect is where consumers change their preference between two options when presented with a third option or a ‘decoy.’ For example, the consumer might be presented with two options: a $89 Nutribullet or a $149 Nutribullet. Here, the consumer is likely to opt for the cheaper option. However, when a third, say $125 option is offered, the consumer might be nudged into purchasing the more expensive $149 option as it appears more attractive or better value for money.
- Asymmetric dominance is where the ‘decoy’ is priced to make one of the other options much more attractive in terms of its perceived value.
- ‘Tyranny or paradox of choice’ is where the consumer experiences choice overload. When presented with greater choice complexity it can heighten anxiety among consumers resulting in sub-optimal decision-making. This supports the notion that consumers exhibit bounded rationality due to cognitive overload or the inability to process too much, or complex information. Consumers will often take ‘mental shortcuts’ such as focussing only on a couple of criteria when making a decision, whether it be price and/or quantity to expedite and simplify the decision-making process. However, this can result in consumers making decisions that fail to maximise their utility.
- The ‘decoy effect’ is designed to ‘nudge’ the consumer towards purchasing the more expensive and profitable option. The decoy effect’ is considered to be a ‘nudge’ because the consumer is still free to choose, which option they want. That is, options are not being removed, and the consumer is not being compelled into making a particular choice.
- The Australian newspaper uses the option of a ‘irrelevant alternative’ or a digital only subscription to nudge consumers into opting for the more profitable digital + weekend paper subscription. This is done to discourage the consumer from choosing the more expensive six-day paper subscription, which is not profitable from the newspaper’s perspective because of the cost associated with printing and distributing physical newspapers.