The substitute products they are at least two products that could be used to satisfy some of the same consumer needs. 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..
In consumer theory, substitute products are goods that the consumer perceives as similar or comparable, in such a way that having more than 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..
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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.
If one product responds immediately to a change in the price of another, in case the 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 with a Coke as with 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..
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 items as another store of the same type of food nearby. They are in direct competition. They are direct competitors.
In various 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 suppliers mainly depend on the brand and the price to achieve sales..
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..
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..
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.
In an attempt to be the lowest priced seller on the market, companies seek to use the fewest resources in their manufacturing process to reduce costs..
However, this works against the consumer's well-being and leads to the creation of low-quality 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 cars, since they are elements that a consumer can use indistinctly 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 demand for McDonald's, and vice versa. Satisfy the component of positive cross elasticity 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 paper books.
- Fanta and Crush.
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..
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