What is a substitute product? Definition and examples

Substitute products Where substitutes are at least two products that could be used for the same purpose by the same consumers.

If the price of one of the products increases or decreases, the demand for the substitute products or the substitute products (if there is only one) is likely to increase or decrease. The other products – the substitutes – have a positive cross elasticity of demand.

Substitute products are the same, similar or comparable to another product in the eyes of the consumer.

Substitute products can fully or partially meet the same customer needs. Therefore, they can replace each other, believes the consumer.

Pepsi-Cola is a good substitute for Coca-Cola, and vice versa. When the price of Coca-Cola increases, the demand for Pepsi-Cola will subsequently increase (if Pepsi does not increase its price).

According to the Cambridge dictionary, the substitute products are:

“Products that can meet some of the same customer needs as each other. Butter and margarine are classic examples of substitutes.

If someone does not have access to a car, they can travel by bus or by bicycle. Buses or bicycles are therefore substitutes for cars. Substitute products are two or more products that the consumer can use for the same purpose.

Examples of substitute products

Below is a list of some common substitutes:

  • Coca & Pepsi
  • McDonald’s and Burger King
  • Colgate & Crest (toothpaste)
  • Coffee tea
  • Butter & Margarine
  • Kindle and printed books
  • Fanta & Crush
  • Potatoes in one supermarket and potatoes in another supermarket.

Both McDonald’s and Burger King’s burgers meet consumer demands to be served quickly and relatively inexpensively.

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

If one product responds immediately to a price change to another – if demand increases by the same percentage as the price increase of others – it is a ‘perfect substitute’ Where “Close proximity”. If the cross elasticity is low – if a 20% increase in the price of one only results in a 1% increase in the demand of another – we speak of ‘weak substitute.’

Substitute goods - Cross elasticity of demand
When a rise in the price of one commodity causes an immediate and equal increase in demand for another, they are substitutes. There is a positive cross elasticity of demand.

The definition of a ‘perfect substitute’ it all depends on the preference of the consumer. If I get the same satisfaction from Coke as I do from Pepsi, they are perfect substitutes. If you think one tastes better than the other, then Pepsi is a “Almost perfect substitute” for Coke, or vice versa.

Direct and indirect competition

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

For example, a frozen yogurt store and an ice cream store sell different products. However, they both target 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 nearby frozen yogurt store. They are in direct competition. They are direct competitors.

Substitute goods and monopoly competition

In several markets for everyday purchasing goods, certain products are perfectly substitutable but are branded and marketed differently. We call this condition monopolistic competition.

Substitution voucher - Graphic exampleImagine that the price of a can of Coke increases by P1 High2. People would consume less Coke – the amount decreases from Q1 to Q2. For a can of Pepsi – the substitute product – the demand curve shifts for all price points, from D to D1, leading to greater consumption of the substitute good. (Image: adapted from Wikipedia)

Consider, for example, the comparison between a brand name and the generic version of a drug. The two products may be the same, they have the same ** active ingredient – they are substitutes. However, their packaging is quite different.

** The active ingredient is the part of a compound or substance that produces its biological or chemical effect. In other words, it treats, alleviates or cures the disease or condition of the patient.

Since the two products are essentially the same, the only real difference between the two drugs is the price. In other words, both sellers mainly depend on brand and price respectively to make sales.

The five forces

Substitute products are one of the five forces. The other four are existing customers, new customers, entry barriers and suppliers.

The five forces are external factors that tell us how viable an industry is, that is, how profitable. When a business is viable, we expect it to make a profit year after year.

About Chris McCarter

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