SUBSTITUTE PRODUCTS: FEATURES AND EXAMPLES - ECONOMY - 2025

The substitutes are the least two products that could be used to meet some of the same needs of consumers. They are elements that are identical, similar or comparable to another product, in the eyes of the consumer.

Substitute products can fully or partially satisfy the same customer needs. Therefore, they can replace each other, as the consumer considers it.

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In consumer theory, substitute products are goods that the consumer perceives as similar or comparable, in such a way that having more of one of them makes less of the other desired. Formally, X and Y are substitutes if as the price of X increases, the demand for Y increases.

It is important to note that when talking about substitute products, two different types of them are referred to. Therefore, the substitutability of one good for another always has a certain degree.

For example, a car and a bicycle can be substituted for each other to a certain extent: if the price of motor fuel rises considerably, one can expect that some people will switch to bicycles.

characteristics

A substitute product, unlike a complementary product, is a good with a positive cross elasticity of demand.

This means that the demand for one good increases when the price of another product increases, both in the same direction. Conversely, the demand for one good falls as the price of another product falls.

-Perfect substitute product

If one product responds immediately to a change in the price of another, if demand increases by the same percentage as the price increase of the others, then it will be a "perfect" or "almost perfect" substitute product.

The definition of a "perfect" substitute product depends on consumer preference. If you get the same satisfaction from a Coke as you get from a Pepsi, then they are perfect substitutes.

If one of them is considered to taste better than the other, then Pepsi will be a "near perfect" substitute for Coca-Cola, or vice versa.

On the other hand, if the cross elasticity is slight, for example if a 20% increase in the price of one product leads to a 1% increase in the demand for another, this will be known as a "weak" substitute product.

-Direct and indirect competition

Close substitute products are in indirect competition, that is, they are similar products that target the same group of customers and satisfy the same needs.

For example, a frozen yogurt shop and an ice cream parlor sell different products. However, both are aimed at people who are hungry and want something sweet and cold. Therefore, they are in indirect competition. They are indirect competitors.

A frozen yogurt store sells the same products as another store of the same type of food nearby. They are in direct competition. They are direct competitors.

-Monopoly competition

In several commonly purchased product markets, some products are perfect substitutes, but they are branded and marketed differently. This condition refers to what is known as monopoly competition.

For example, you can consider the comparison between a brand name and the generic version of a drug. The two products can be identical, since they have the same active ingredient; therefore, they are substitute products. However, its packaging is quite different.

Since the two products are essentially identical, the only genuine difference between the two drugs is the price. That is, the two vendors rely primarily on brand and price to achieve sales.

-Impact

A product with several substitutes is difficult to rate

Any manufacturer of a substitute product will always try to sell more. However, the only thing you can trust is the brand and the price. Therefore, the price of products with several substitutes is highly volatile.

In a market where there are fewer substitute products, there will be a greater probability of obtaining higher profits.

Wide variety of products to choose from

The availability of more products can go a long way. No product as such can satisfy all consumers of a particular type of them.

Therefore, the greater the number of substitutes, the greater the probability that every consumer will obtain what is best for him.

High competition

The greater the number of substitute products on the market, the greater the rivalry in the industry.

When competition becomes intense, there are controls associated with imminent risk.

Low quality products

In an attempt to be the lowest priced vendor on the market, companies seek to use the fewest resources in their manufacturing process to reduce costs.

However, this works against consumer welfare and leads to the creation of low-quality products.

Examples of substitute products

Potatoes from different supermarkets are an example: if the price of those from one supermarket increases, then it can be assumed that fewer people will buy potatoes from that establishment and obtain them from another.

If someone does not have access to a car, they can travel by bus or bicycle. Therefore, buses or bicycles are substitutes for automobiles, since they are elements that a consumer can use interchangeably to achieve the same objective.

McDonald's and Burger King hamburgers meet consumer requirements to be served quickly and relatively cheaply.

The price of Burger King hamburgers has a direct effect on McDonald's demand, and vice versa. They satisfy the positive cross-elasticity component of demand for substitute products.

Butter and margarine represent a classic example of what a substitute product is. Here is a list of some common substitute products:

- Colgate and Crest toothpaste.

- Tea and coffee.

- Kindle and books printed on paper.

- Fanta and Crush.

Graphic example

Pepsi-Cola is a good substitute for Coca-Cola, and vice versa. If the price of Coca-Cola rises, the demand for Pepsi-Cola will subsequently increase, in case Pepsi does not increase its price as well.

Suppose the price of a can of Coca-Cola increases from P1 to P2. People would consume less Coca-Cola: the amount decreases from C1 to C2.

For a can of Pepsi, which is the substitute product, the demand curve shifts upward for all its price levels from D to D1, leading to higher consumption of the substitute product.

References

1. Market Business News (2019). What Are Substitute Goods? Definition And Meaning. Taken from: marketbusinessnews.com.
2. Wikipedia, the free encyclopedia (2019). Substitute good. Taken from: en.wikipedia.org.
3. CFI (2019). What are Substitute Products? Taken from: corporatefinanceinstitute.com.
4. Will Kenton (2019). Substitute. Investopedia. Taken from: investopedia.com.
5. Tejvan Pettinger (2016). Substitute Goods. Economics Help. Taken from: economicshelp.org.