An inferior third option changes what we choose between the other two.
Adding a third option, designed to lose against one of the other two, changes which of those two we end up choosing. The decoy is almost never chosen itself. Its job is to make another option look better by comparison.
The Economist magazine offered three subscription plans. Digital only for $59, print only for $125, and print plus digital also for $125. Almost no one chose the print-only option, because at the same price, print plus digital gave strictly more. When this same structure was tested in an experiment with students, adding that intermediate "decoy" option made the majority choose the more expensive combined plan, compared to a group that was only offered the digital-only and combined options, without the decoy in between.
We don't evaluate options in an absolute vacuum, we compare them against each other. An option that clearly dominates another (gives more for the same, or the same for less) makes that comparison easy, and that ease pushes the choice toward the option that wins the direct comparison.
Source: Huber, J., Payne, J. W. & Puto, C. (1982). Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis. Journal of Consumer Research, 9(1), 90-98.
A three-tier pricing menu, where the middle tier exists mainly to make the top one look better, is one of the most direct and widely used applications of this effect in software, telecommunications, and subscription services.
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