What are substitute products

Substitute goods (from the Latin "substitutio" - replacement) - interchangeable goods that are comparable in their functional purpose, scope, quality, price, technical and other parameters.

Substitute and complementary goods

Substitute goods perform equivalent functions and are aimed at meeting the same needs. Examples of such products include tangerines and oranges, tea and coffee, etc. Substitute goods include productive resources — coal and gas, metal, and plastic.

The demand curve in many respects depends on the price of goods - for example, an increase in the price of a single product entails an increase in demand for a replacement product. For example, a drop in tea prices 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 correlation between the demand and the price of substitute goods.

If the 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 entails increased competition, limits the profit of market participants and forces them to restrain prices.

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 complementary goods (complementary goods). Complementary are goods that are able to satisfy the needs of customers only in conjunction with others. For example, a computer and software, a car and gasoline, a washing machine and powder, a toothbrush and paste. Distinguish between absolute complementarity (skiing and sticks) and relative (coffee and sugar). For complementary goods, the relationship between demand and price is the opposite. In this case, when the price of one product rises, the demand for both products decreases. There are examples of successful business based on the production of complementary goods. For example, the growth in iPhone sales has led to the emergence of a developed industry of accessories for it (cases, cases, etc.).