An inventory-theoretic perspective on the asymmetric-dominance effect

The asymmetric-dominance effect occurs when consumers change their preferences between products when another (a decoy) is added to the assortment. This phenomenon has been extensively studied in the consumer-behavior/marketing research literature. However, despite its direct relevance to consumer product distribution, the effect this has on a firm’s inventories has not been studied. This paper presents a model that integrates a consumer-preference model to account for the decoy’s effect on the relative market share of the existing products with a multi-item, single-period inventory model that accounts for product substitution resulting from the addition of the decoy. The ensuing inventory levels and profit contribution are investigated for a variety of situations, including competitive vs. cooperative scenarios as well as the effect of double decoys and offsetting a competitor’s decoy with a firm’s own decoy. We find that adding a decoy to a firm’s assortment can result in a substantial gain in profits—accomplished with small inventories of decoys—due to the demand drawn from the competitor’s product. The loss realized from a competitor’s decoy can be offset by a firm’s own decoy, and a firm may further improve their profits with a double decoy, albeit with diminishing returns.