Substitute Good

When two goods are substitutes, a rise in the price of one tends to increase demand for the other, because people switch to the cheaper option. This gives them a positive cross-price elasticity.

For example, if the price of butter rises sharply, some shoppers will buy margarine instead. If one airline raises fares on a route, some passengers will choose another airline flying the same route.

Some substitutes are very close, such as two brands of bottled water, while others are less close, such as a train journey and a video call that avoids travelling at all.

The availability of substitutes has a big effect on pricing. A company selling a product with many close substitutes has little power to raise prices, because customers can easily switch. A company whose product has few substitutes can raise prices more easily. This is why businesses try to make their products distinctive, through branding, quality or features, so that customers see fewer alternatives.