Proﬁting from the Decoy Eﬀect: A Case Study of the Online Diamond Marketplace
45 Pages Posted: 14 Nov 2018
Date Written: October 22, 2018
The decoy effect (DE), first introduced by Huber et al. (1982), has been robustly documented across dozens of product categories and choice settings using lab experiments. However, in the literature, the DE has never been veriﬁed in a real marketplace. In this paper, we empirically test and quantify the DE in a major online diamond marketplace. We 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. Results suggest that decoy-dominant detection probabilities are low (10%-29%) in the diamond marketplace; however, upon detection, the DE increases dominant diamonds’ sales hazards significantly (2.3-4.4 times). To understand the DE’s managerial signiﬁcance, we quantify its proﬁt impact and ﬁnd that it contributes 21.4% of the diamond retailer’s proﬁt. Finally, we explore various strategies that might help the retailer to further increase profitability. We find that the retailer’s proﬁt can increase up to 5.4% via effective utilization of the DE.
Keywords: Decoy Effect, Attraction Effect, Asymmetric Dominance Effect, Context Dependent Choice, Proportional Hazard Model, Diamond Pricing
JEL Classification: M31
Suggested Citation: Suggested Citation