Substitutes, or interchangeable goods, are (examples we will consider) goods that have the ability to replace each other in the market, due to similar properties, the same scope, and meet the uniform needs of consumers.
Also substitutes may be:
- benefits (cinema, theater, amusement park, etc.);
- resources (oil, gas, coal, etc.);
- services (fitness room, gym, etc.).
In fact, absolutely any service or product can be replaced by others. This is especially pronounced today. The competition in the market is huge, there are a lot of substitute products. The concept of interchangeability probably did not exist in times of deficit.
Interchangeability is divided into:
- Absolute, or, as it is also called, perfect. This is a product / service that can completely replace other goods / services. For example, when heating a room, firewood can completely replace coal. If someone bought a red rose, then buying a yellow one is not necessary.
- Relative interchangeability. These are goods / services that are an alternative and do not cause the need to use the same at the same time. For example, cocoa replaces a coffee drink for breakfast. Or if we have tickets to the circus, then we may not go bowling.
What role does the demand for interchangeable goods play?
In real life, there is a relative mutual replacement of goods. Absolute is much less common. In trade, the price of a product depends on the demand for it. If one substitute is able to replace another, then a directly proportional relationship is established between the price of one and the demand for another. For example, a decrease in the cost of fermented baked milk will invariably lead to a decrease in demand for kefir. And the rise in price of coal will increase the demand for firewood.
What determines the demand for interchangeable products?
One of the substitutes may be in less demand due to its poor quality. Or, conversely, be in demand due to the low income level of the population. Cheap shoes of poor quality will be bought by people who do not have the means for leather. It follows that the demand for certain products depends on the purchasing power of the population.
Substitute Options
Interchangeable goods are characterized by the following parameters:
- destination;
- application area;
- quality description;
- technical specifications;
- price.
In fact, the consumer does not care which product or type of service to prefer if they are interchangeable. Therefore, the choice of buying a product will determine the combination of its price and quality, as well as the level of consumer income.
Concept of competition
It has already been said that many products have an alternative to it. There is such a thing as competition.
Competition is a situation in the market of goods or services in which most manufacturers present similar items of trade to consumers.
Interchangeable goods compete with each other in the market, as differentiated goods (similar, but not analogous) with substitutes (interchangeable), and substitute goods among themselves.
Reasons for competition
The reasons for the competition of interchangeable goods with differentiated ones:
- Substitutes are kept within the price range. If the prices of other items of trade are significantly higher than interchangeable, then their selling ability will decrease to a minimum, which is not profitable for both the manufacturer and the seller.
- Substitute products are able to provide the buyer with a higher price-quality ratio than differentiated goods.
- Substitutes bring profit to producers not by high prices for them, but by high sales turnover.
Interchangeable goods compete with each other, and rivalry is increasingly fierce.
The reasons for the competition of interchangeable goods with each other in the market lie in the tendency to increase their level in the market in every possible way, to acquire as many consumers of this type of product as possible. To increase the demand for substitute products, manufacturers have to resort to an increase in advertising costs and even to improve product quality.
One of the important reasons for substitutes competing among themselves is the wide choice of imported goods on the market for interchangeable goods. Imported products are in great demand among buyers, and rather, not because of an overseas manufacturer, but because of their characteristics. Often its quality is higher, and the price is equal to domestic products.
At a higher price, imported interchangeable goods attract consumers with greater purchasing power with their new look and prestige. If foreign goods are cheaper than domestic products with the same level of price and quality, then they will also be in demand among buyers with low incomes. In contrast to this fact, a wide choice of interchangeable goods on the market entails equalizing their prices.
Same price for substitute products
What determines the price of substitutes? Strong competition is the cause of price competition. This explains the presence, if not the same prices for a certain group of interchangeable goods, then distinctive to a small extent. That is, interchangeable goods have the same price. It is also not possible for suppliers, and therefore sellers, to evaluate a substitute product higher than competitors if this product is perishable.
For domestic products, the presence of substitutes imported from abroad on the market increases the level of competition. If the state does not use the levers of its regulation, a sharp decrease in demand for domestic products may arise. Purchasing preference plays an important role in the demand for goods. Therefore, it is extremely important for domestic manufacturers to take into account the tastes of customers and improve the quality of goods so that imported substitutes are not able to be strong competitors in the market for substitute products.
So, interchangeable goods are goods, products and services that compete with each other in the market. They set the same price and approximately equal level of consumer demand.
