Substitute Goods: Concepts, Examples, Types, etc.

Feb 25, 2023

What are substitute goods according to various authors?

The concept of substitute goods has been discussed by many economists and academics, all of whom have contributed to our understanding of the concept of substitute goods and how they influence consumer behavior and market outcomes. and here are some perspectives:

Robert Eberle, president and CEO of Bottomline Technologies tells us that substitute goods are products or services that can be used interchangeably to fulfill the same purpose. He proposes that, when seeking inspiration, ideas and new discoveries should not be copyrighted, but should be analyzed for possible substitute goods that can be used for the same purpose.

The Agricultural Marketing Service (AMS) tells us that products sold at farmers' markets that fill a particular niche and can be exchanged for another product if the need arises. For example, according to its National Agricultural Markets Survey in 2006, the most commonly sold produce category at farmers' markets was fresh produce, but other items, such as flowers and eggs, could also be used to fill this niche.

The World Economic Forum simply states that substitute goods are "products or services that can be used in place of others" and that this can have important implications for pricing strategies and market outcomes.

American economist Paul Anthony Samuelson defines it as two goods that the buyer can use for the same purpose. He notes that the cross-elasticity of demand indicates how the quantity demanded of one good varies when the price of another changes, which can be used to measure the relationship between substitute goods.

The website The Balance, which focuses on simplifying personal finance topics and news, describes substitute goods as "goods that can be used in place of another". They explain that when the price of one substitute good rises, consumers will shift their demand to the other substitute good, and that this can result in increased competition between the two goods.

According to Alfred Marshall, a 19th century economist and founder of the neoclassical school, substitute goods are those that have a high cross-elasticity of demand, which means that when the price of a good rises, consumers will switch to a substitute good with a lower price.

Harvard Business Review notes that substitute goods are those that "perform the same function and have similar benefits".

Neoclassical economists usually consider substitute goods to be interchangeable in the eyes of consumers.

When two goods are close substitutes, a small increase in the price of one will cause consumers to switch to the other.
Hal Varian

Austrian economist and politician Joseph Schumpeter argued that substitute goods are not necessarily identical products, but can also be new products that rival existing products. He called this process "creative destruction" and believed it was a key driver of economic growth.

Behavioral economists point out that consumer behavior is influenced by factors such as habit, inertia and social norms, which can affect consumers' perceptions of substitute goods, i.e. consumers may be more likely to stick with a brand or product with which they are familiar, even if a cheaper substitute exists.

Economist Gary Becker developed the concept of "rational addiction", which proposes that consumers may become addicted to certain products and see them as substitutes for other goods. For example, a smoker may see cigarettes as a substitute for other stress-relieving activities.

The Business dictionary for entrepreneurs website defines substitute goods as "goods that are different in nature but satisfy the same needs or wants". They emphasize that substitute goods can be complementary or competitive, and that the availability of substitute goods can affect the price and demand for other goods in the marketplace.


Different views on substitute goods may be based on a variety of factors, such as:

  • Market trends
  • Personal perspectives
  • Theoretical frameworks
  • Consumer priorities
  • Existing technologies.
  • Empirical evidence

Some economists argue that a product is a substitute if it can be used to satisfy the same purpose as another product, while others argue that a product is a substitute if the quantity demanded of one good changes when the price of another good changes.

The existence of substitutes for a good limits a monopolist's market power because consumers may turn to the substitute if the monopolist raises its price.
Janet Yellen


Marketing research has revealed that consumers may use a number of criteria to evaluate substitute goods, such as quality, price and brand reputation. For example, consumers may prefer a higher-priced substitute good if they consider it to be of higher quality than a lower-priced substitute.

Discovering how consumers evaluate substitute goods can help marketers develop effective pricing and promotion strategies.


Environmental economists often look at the concept of substitute goods in the context of sustainability and resource management.

Some studies analyze how the availability of substitute goods affects the demand for natural resources such as water or energy.

Others focus on how the development of new technologies or alternative products can limit the demand for scarce resources.

The existence of close substitutes is a powerful force that limits the ability of firms to raise prices.
Richard Thaler

What goods are substitute products?

Coca-Cola and Pepsi: Both are sweet, carbonated beverages.

Tea and coffee: Both provide a source of caffeine; however, consumers may have a preference for one or the other based on taste, cultural preferences, personal preferences, or health considerations.

Butter and margarine: Both provide similar nutritional benefits, however, some consumers may prefer one over the other based on taste or health considerations.

Streaming services: Netflix, Hulu, and Amazon Prime offer similar content, however, consumers may choose based on factors such as price, selection, or user interface.

Smartphones: Apple's iPhone and Samsung's Galaxy series offer similar features and functionality and compete for consumer attention and loyalty.

Means of transportation: Cars and bicycles; gasoline-powered mechanical vehicles and electric vehicles.

Food: Regular sugar and artificial sweeteners; canned vegetables and frozen vegetables.

Reading: E-books and paper books.

Characteristics of substitute goods

Knowing these characteristics can help business and political leaders make informed pricing, marketing and resource allocation decisions.

  • They are products or services that can be used in place of others for similar purposes.
  • Consumers switch easily from one to another
  • They perform the same function and solve the same problems.
  • Have similar characteristics
  • An increase in the price of one substitute good causes an increase in the demand for the other substitute good
  • Availability can affect the elasticity of demand for a given good
  • They provide similar benefits
  • Are interchangeable in the eyes of the consumer
  • They are usually very competitive
  • Substitute goods compete with each other in the marketplace
  • Demand for substitute goods is often sensitive to price changes
The ease with which consumers can switch to substitute goods makes it difficult for firms to exercise market power.
Joseph Schumpeter

Perfect substitutes

These are goods that are identical in all respects, including quality, characteristics and price. These goods are so similar that customers do not perceive any difference between them and it is irrelevant to them which of the two they consume.

In a market with perfect substitutes, price is the only decisive factor for buyers. This means that the producers of these goods must compete exclusively on price, which can lead to price battles and low profit margins.

In reality, it is rare for two products to be perfect substitutes due to factors such as brand loyalty, packaging or marketing.

Examples of perfect substitutes

This includes all standardized products.

Generic pharmaceuticals: These are often perfect substitutes for brand-name pharmaceuticals because they both contain the same active ingredients and are regulated to be chemically identical.

Agricultural products: Rice, beans, wheat, corn, coffee, tomatoes, milk, some fruits.

Commodities: Oil, natural gas, gold, among others, can often be perfect substitutes because they are traded in commodity markets and are standardized in terms of quality and quantity.

Iron, copper, nickel, aluminum, etc. have the same physical properties and can be used interchangeably in manufacturing processes.

Leisure activities: these include movies, concerts, baseball and football games and other sports.

Some packaged products: a clear example is mineral water and juices.

Substitute goods are not perfect substitutes, but they are close enough to be able to influence each other's prices and demand.
Kenneth Arrowr

Imperfect Substitute Goods

These are goods or services that substitute for another good or service, but have significant differences; they are similar, but not identical in all respects, including:

  • Quality
  • Brand image
  • Price
  • Marketing
  • Taste
  • Durability
  • Other characteristics of the product or service

In addition, demand for a substitute good may be affected by changes in the price or availability of the original product.

Although they may be used interchangeably to some extent, customers experience some difference between the products and may prefer one over the other. This choice may be driven by factors such as taste, brand loyalty or specific needs.

Examples of Imperfect Substitute Goods

Smartphones: Android and Apple cell phones, both offer similar functionality, differ in terms of operating systems, user interfaces, and app availability.

Trains and buses: Both are public transportation alternatives that can be used for travel, but differ in terms of speed, comfort and accessibility.

Tea and coffee: Tea and coffee are hot beverages that provide caffeine, but are distinguished by their taste, preparation and cultural significance.

Pepsi and Coke: Both are carbonated beverages with similar taste and ingredients, but buyers may prefer one brand over the other for reasons of taste, marketing or cultural associations.

Beef and chicken: Both beef and chicken are sources of protein, but differ in taste, texture and nutritional content. Some consumers may have a preference for one over the other based on personal preference, cultural or dietary restrictions, or health considerations.

Bills and Coins: one $10 bill versus 10 $1 coins.

Beer and Wine

Regular Gasoline and Premium Gasoline

selling on the foreign exchange market

What are gross substitute goods?

Gross substitutes are often seen as complementary goods, which are goods that can be substituted for each other in terms of utility, meaning that if the price or availability of one good changes, the demand for the other will also change. In other words, the two goods have a positive cross-elasticity of demand.

For example, if the price of coffee rises, consumers may substitute coffee for tea, leading to an increase in the demand for tea.

Gross substitute goods are often used in economic analysis to study how price changes affect the demand for related products.

The concept is important for understanding the evolution of markets and how changes in the prices of one product can affect the demand for another.

Gross substitute goods are the opposite of gross complementary goods, which are products whose demand decreases as the price of a related product increases.

What are net substitute goods?

Net substitute goods are goods that are interchangeable in terms of utility and if the price or availability of one good changes, then the demand for the other good will also change.

This means that the two goods are substitutes and that, as the price of one of them changes, consumers will adjust their purchases of both goods so that there is an overall change in the demand for the two goods. In other words, the two goods have a negative cross-price elasticity of demand.

For example, if the price of electric cars decreases, consumers may switch from gasoline cars to electric cars, leading to an increase in the demand for electric cars and a decrease in the demand for gasoline cars.

Net substitute goods are the opposite of net complementary goods, which are products whose demand increases when the price of a related product rises.

What are complementary goods?

Complementary goods are products or services that are often used together. The use of one good or service increases the value or utility of the other good or service.

In other words, complementary goods are items that are consumed together, so that an increase or decrease in the demand for one good or service affects the demand for the other good or service.

Examples of complementary goods

Cars and gasoline are complementary goods because cars need gasoline to run, so a decrease in the price of gasoline can lead to an increase in the demand for cars because people will find it cheaper to drive them.

A printer needs ink cartridges to run, so the demand for printers and ink cartridges are complementary goods.

Money can't buy happiness, but it can buy substitute goods
Speak Your Mind