Product Decoys: A Supply Chain Perspective

Quan Zheng, Xiajun Amy Pan and Asoo J. Vakharia

Production and Operations Management, 2021, vol. 30, issue 9, 2858-2870

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 also 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.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/poms.13391

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:30:y:2021:i:9:p:2858-2870

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().