Profiting from the Decoy Effect: A Case Study of the Online Diamond Marketplace

45 Pages Posted: 14 Nov 2018

See all articles by Chunhua Wu

Chunhua Wu

University of British Columbia (UBC) - Sauder School of Business

Koray Cosguner

Indiana University - Kelley School of Business - Department of Marketing; Georgia State University - J. Mack Robinson College of Business

Date Written: October 22, 2018

Abstract

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

Wu, Chunhua and Cosguner, Koray, Profiting from the Decoy Effect: A Case Study of the Online Diamond Marketplace (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=3271331 or http://dx.doi.org/10.2139/ssrn.3271331

Chunhua Wu (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Koray Cosguner

Indiana University - Kelley School of Business - Department of Marketing ( email )

Kelley School of Business
Bloomington, IN 47405
United States

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

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