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

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The decoy effect (DE) has been robustly documented across dozens of product categories and choice settings using laboratory 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.

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