Glossary · Behavioral Economics
Decoy Effect
also: asymmetric dominance effect · attraction effect
Definition
The decoy effect is the phenomenon where adding a third, asymmetrically dominated option to a choice set shifts preference toward the target option. In dynamic pricing it is operationalized by introducing a decoy tier designed to be chosen against, increasing conversion to the intended price point by 20–40% in controlled experiments.
Documented by Huber, Payne and Puto (1982), the decoy effect (asymmetric dominance) demonstrates that preference is not stable: people choose differently when the set of alternatives changes, even if the target option itself is unchanged. In pricing, a decoy is a third option that is strictly worse than the target on at least one dimension while being comparable or worse on others, making the target look dominant by contrast. Decoys systematically shift choice share toward the target — the classic Economist magazine subscription example moved print+digital from 32% to 84% share.
Essays on this concept
- Digital Economics
Attention Economics Quantified: Measuring the True CPM of Cognitive Load in Digital Advertising
CPM measures whether an ad loaded in a browser. It says nothing about whether a human noticed it. Here's a framework for pricing what actually matters — the cognitive cost of attention — and why the gap between CPM and true attention cost is where billions in ad spend disappear.
- Behavioral Economics
The Decoy Effect Reimagined: Dynamic Price Anchoring with Real-Time Behavioral Segmentation
A dominated third option can shift 22% more users to your premium plan. But the static decoy is dead — here's how real-time behavioral data makes asymmetric dominance adaptive.
- E-commerce ML
Dynamic Pricing Under Demand Uncertainty: A Contextual Bandit Approach with Fairness Constraints
Airlines have done dynamic pricing for decades. E-commerce is catching up — but without the fairness constraints that prevent algorithms from charging different people different prices for the same product based on inferred willingness to pay.
Related concepts
Authoritative references