Issue 5 of The Psychology of Pricing
Most people are comparison shoppers, in that they decide what the best option is based on the choices that are available. While relying on comparisons can be a very helpful rule of thumb, there are occasional blind spots in decision making that can lead to interesting and not-always-ideal outcomes. One of these blind spots is what behavioral economists call the “Decoy Effect.”
Imagine that you’re going to the movies and you want to buy some popcorn. There are two options: A small bag for $4.50 and a large one for $7. You want decent sized popcorn, yet you can’t quite justify getting the large one, so you decide on the small for $4.50.
The next time you go to the movies, they have changed the menu. Now, they offer a small for $4.50, a medium for $6.75, and a large for $7. You still want a decent size, and the medium catches your eye. As you are about to get it, you notice that the large one is only 25 cents more - What a deal! Not wanting to miss out, you get the large one.
The popcorn decision is one example of what is known as the “decoy effect.” In the case above, the $6.75 option is the decoy, as it isn’t likely to be chosen. It is not there to be a popular choice; it is there to make the $7 option seem like a great deal.
The decoy effect shows that the way we judge a product’s worth depends heavily on what our options are. It also shows that sometimes seemingly irrelevant options heavily influence people’s choices. These “decoy” products push their references around enough to make people choose differently.
The context in which we make choices makes a difference. Options that may seem pointless given their dismal sales figures can shift what consumers choose to buy.
- Look at a restaurant menu. Can you spot a decoy?
- Have you ever taken a flight and attempted to buy Wifi? Next time, try to catch the decoy in their pricing.