Profiting from the Decoy Effect: A Case Study of the Online Diamond Marketplace
March 25 2020
Based on my life experience of engagement ring purchase!
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, it has never been verified in a real product market in the literature. In this paper, we empirically test and quantify the DE in the diamond sales of a leading online jewelry retailer. 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 (11%–25%) in the diamond market; however, upon detection, the DE increases dominant diamonds’ sale hazards significantly (1.8–3.2 times). In terms of the managerial significance, we find that the DE substantially increases the diamond retailer’s gross profit by 14.3%. We further conduct simulation studies to understand the DE’s profit impact under various dominance scenarios.
Keywords: Decoy Effect, Attraction Effect, Asymmetric Dominance Effect, Context Dependent Choice, Proportional Hazard Model, Diamond Pricing
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