Branded vs. ‘Value’ Products: What Stores Don’t Want You to Know

You have probably noticed that whenever you go to the pharmacy to buy paracetamol for your headache, there are different brands selling it: ‘value’ paracetamol (e.g. Boots or Everyday Health) for 45p, Anadin for £1.25, Beechams for £3.25… All the same paracetamol, all containing 16 tablets of 500 mg. If you were to choose one of them, which one would you go for?

If the Boots paracetamol was the only one there, you would probably go for it without thinking. But what if next to it you saw the shiny (literally shiny – look at the packaging) packet of Beechams paracetamol, you would probably be tempted to go for the Beechams, unless you’re a poor student like myself and your only goal is to get rid of the headache at the lowest possible cost. You would try and justify it to yourself: it’s probably better, more efficient, safer…

But think about this: when a pharmacist working at Boots gets a headache, what do you think she’ll buy: the £3.25 Beechams pack or the 45p Boots paracetamol? According to Bronnenberg, Dubé, Gentzkow, and Shapiro (2015), about 92 percent of the headache remedies pharmacists buy are store-brand – so in our case, the Boots paracetamol. They also found that chefs are considerably more likely than non-chefs to buy generic salt, sugar, baking soda, etc. rather than the branded ones, as they are more informed than your average consumer.

But that’s not the point. The point is that if you go to Boots, you will notice the Boots paracetamol placed right next to the Beechams pack. At Tesco, the grey and plasticky Everyday Value Eggs box sits close to the brightly-coloured Happy Egg box, with the only two differences being the packaging and a hefty price difference of 43% – that is, if you do not care about whether the eggs are free range or not. The visual contrast is striking. Even more so, they have now started putting the following message on the Everyday Value eggs: "From caged hens". It’s as if the packaging is screaming: “Do not pick me! I’m bad for you!”

According to Bronnenberg, Dubé, Gentzkow, and Shapiro (2015), the reason why the ‘value’ product packaging look so ugly is not because Tesco is reducing the price by saving on design costs, but because they are made to look inferior and induce you to buy the more expensive product. Supermarkets do not actually want you to buy the ‘value’ products – they want you to go for the expensive branded ones.

This strategy of placing the ugly ‘value’ products next to the branded ones is known as the decoy effect. According to Kim, Park, and Ryu (2006), decoy is an inferior option included in a choice set that makes the other options appear superior in comparison, and thus increases the probability of the other alternatives being chosen. They found that overall, including a decoy in the choice set significantly increased the relative preference for the branded good when consumers could observe the brand name.

Huber, Payne, and Puto (1982) performed an experiment to evaluate the decoy effect among six product categories: cars, restaurants, beers, lotteries, film, and television sets. Participants were offered either two or three alternatives when making choices from among the different categories: a target product, a competitor, and a decoy (see Figure A).

The target and the competitor were positioned in a way such that they seemed equally desirable: they each had a dimension on which they were superior (dimension 1 and dimension 2 in the graph). The decoy, however, was inferior to the target product but not to the competitor (hence being anywhere in the shaded area of Figure A).

Across participants, the decoy was positioned in different corners of the space to have a specific effect: moderate range expanding, frequency expanding, range and frequency expanding, or extreme range expanding. The decoy was used in different settings: when product A was the target, product B was the competitor, and vice versa.

The test was repeated two weeks later with 60% of the students in the original test, this time with the decoys removed. The conductors of the experiment then compared the frequencies with which the target and the competitor were chosen with and without the decoy present in the set.

They found that overall, the decoy effect was significant, and stronger across participants (9 points) than within the repeated tests (3 points). The table below presents the summary of choice probabilities for alternative decoy placement strategies.

(Click to enlarge)

We can see that the presence of a decoy had a point change of 9.2 on average ("point change" meaning the percentage points of people who change from the competitor to the target due to the presence of a decoy), but the range of the effect varied between categories of products. It was to be expected: cars and TV sets saw the strongest decoy effect, presumably due to being a much bigger monetary expenditure than, say, a lottery ticket (which only had a point change of 2.0).

Huber, Payne, and Puto (1982) note that the implications of the decoy effect could be very important, especially in consumer choice situations involving large sums of money. They give the following example amongst others: “A manufacturer of cars with relatively poor gas mileage (e.g., 20 mpg) might decrease the effect of this dimension by first showing prospects a high-powered car in the showroom with much worse (8 mpg) mileage.”

So the next time you are at Tesco, take a look around when choosing your products. Are there any ‘value’ alternatives? Are they by any chance placed right next to the most expensive product? And the next time you start reaching for the extra-pure virgin olive oil for £1 a drop, you might want to remember you have a student loan to repay. The store-brand one will do.

References:

Bronnenberg, J., Dubé, J. P., Gentzkow, M., Shapiro, J. M. (2015). Do Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium, National Bureau of Economic Research;

Heath, T. B., and Chatterjee, S. (1995). Asymmetric Decoy Effects on Lower-Quality Versus Higher-Quality Brands: Meta-Analytic and Experimental Evidence, Journal of Consumer Research, 22(3), 268-284;

Huber, J., Payne, J. W., and Puto, C. (1982). Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis, Journal of Consumer Research, 9(1), 90-98;

Kim, J., Park, J., and Ryu, G. (2006). Decoy Effects and Brands, Advances in Consumer Research, 33(1), 683 – 687.