Substitute goods (from the Latin "substitutio" - replacement) are interchangeable goods that are comparable in their functional purpose, scope, quality, price, technical and other parameters.
Substitute goods and complement goods
Substitute products perform equivalent functions and are aimed at meeting the same needs. Examples of such goods are tangerines and oranges, tea and coffee, etc. Manufacturing resources - coal and gas, metal and plastic - are also among the substitute goods.
The demand curve largely depends on the price of goods - for example, an increase in prices for one product entails an increase in demand for a replacement product. For example, a drop in the price of tea can lead to a reduction in coffee consumption and vice versa. Interchangeability can be perfect (absolute) and relative (for example, sour cream and mayonnaise, chicken and beef). Thus, there is a direct relationship between the demand and the price of substitute goods.
If a product does not have a substitute product, and the manufacturer is the only one in its industry, it is a natural monopolist. The presence of substitutes in the market inevitably leads to increased competition, limits the profits of market participants and forces them to keep prices down.
The attractiveness and profitability of the industry is reduced in the event of competition with the products of substitute goods or there are risks of their appearance.
Substitute goods should be distinguished from complement goods (complementary goods). Complementary goods are those that are capable of satisfying the needs of buyers only in combination with others. For example, computer and software, car and gasoline, washing machine and powder, toothbrush and paste. Distinguish between absolute complementarity (skis and poles) and relative (coffee and sugar). For complementary goods, the relationship between demand and price is reversed. In this case, when the price of one product rises, the demand for both goods decreases. There are examples of successful business based on the production of complement goods. For example, the growth in iPhone sales has led to the emergence of a developed industry for iPhone accessories (covers, cases, etc.).
Distinctive features of substitute products
Today, almost every good has its own substitute product. As a rule, buyers choose between substitute products based on a number of parameters.
Market demand indicators depend on the cost of goods, the level of income of buyers, prices for substitute goods and complement goods.
A product can be considered a substitute if it is able to effectively satisfy a similar need. For example, mineral water and tea, although formally aimed at satisfying one need - the elimination of thirst, it is not correct to consider them as substitutes. Mineral water is a ready-to-drink product, while tea must be brewed, rather it is a tonic and invigorating drink.
Another important criterion for choosing substitute goods is their availability or proximity to the consumer and the convenience of shopping.
The cost of substitute goods should be comparable. It is unlikely that the buyer will opt for a substitute if its cost is much higher, while it does not have additional advantages.
Finally, there is quality. When the way in which needs are met by using a substitute product does not meet an acceptable level for the buyer, it is likely to be rejected.
