Product Decoys: A Supply Chain Perspective

Production and Operations Management, Forthcoming

24 Pages Posted: 7 Dec 2020 Last revised: 1 Mar 2021

See all articles by Quan Zheng

Quan Zheng

University of Science and Technology of China - School of Management

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration

Asoo Vakharia

affiliation not provided to SSRN

Date Written: September 27, 2020

Abstract

Conventional wisdom suggests that by including a decoy product in the choice set for consumers, a firm can drive consumers to select more profitable non-decoy products. Explanations offered to explain such outcomes are rooted in the psychology of consumer behavior. A scan of retail practice, however, indicates that decoys might also be included in a product assortment for economic reasons. For example, products with very low sales potential are often included in offerings by bricks-and-mortar and online retailers. This leads us to investigate and offer an alternative supply side explanation for the presence of decoy products in a supply chain.

More specifically, we show that in a distribution channel with multiple asymmetric manufacturers and a single retailer, there exists the possibility of an equilibrium which includes a decoy product. Such an equilibrium is characterized by the retailer stocking positive quantities of products from a subset of low-cost manufacturers (active manufacturers) and negligible or even zero stock of a decoy product sourced from a higher-cost manufacturer. The retailer includes a decoy product in the assortment since it helps to obtain better contractual terms from the active manufacturers. Recognizing this, upstream active manufacturers not only compete for market share but are induced to cooperate (in setting wholesale prices) so as to ensure that the manufacturer of the decoy product is driven out of the market. We also find that the degree of product substitutability moderates which manufacturer's product is a decoy. Our findings provide theoretical support for industry practice as well as implications for retail assortment decisions.

Keywords: product decoys; retailing; asymmetric manufacturers; co-opetition

Suggested Citation

Zheng, Quan and Pan, Xiajun and Vakharia, Asoo, Product Decoys: A Supply Chain Perspective (September 27, 2020). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3700309

Quan Zheng (Contact Author)

University of Science and Technology of China - School of Management ( email )

Hefei, Anhui
China

Xiajun Pan

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Asoo Vakharia

affiliation not provided to SSRN

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