Factor Affects Demand: Substitutes

Factor Affects Demand: Substitutes

            Today, many things can be served as replacement for one another.  This good can be the substitute for another good.  For example, butter can be substituted with margarine, McDonalds and Burger King can be substituted with each other, Coffee Bean can substitute with Starbucks or vice-versa and many more.  These things are related goods.  They can be resembled in term of their functions, taste, packaging and others.

            The common example of substitutes that everybody knows is Coke and Pepsi.  Both of them are the famous beverage around the world.  Before that, there is also a “Cola Wars” between the two brands.  Some people support coke but some support Pepsi depend on which one they more likely to be fond of.  For me, I like both Pepsi and Coke.  They are related goods which both of them are soft drinks and even the colour is also the same.

            Even as the two brands fight to differentiate themselves by taste, packing design, demographic, at least one thing remains more likely the same between the two brands is price.  Both of the brands have not much different in their price.  But, now the question is, if one day, one of the brand increase its selling price which is more expensive compared to the other, will the consumers switch to another brand?

            For Coke and Pepsi, if one of the brands prices itself much higher, it may experience declining demand.  On the other hand, if the price of the brand is lower, it probably has more demand.  However, some people may have more favor to one of the brand.  Although the price of that brand increases, they may still support the brand instead of the other.

            In my opinion, if the price of one good increases, the demand for the substitute increases.  Yet, for Coke and Pepsi, different people might have their own opinion on the effect of pricing strategic on the brands.

By Lee Lin Lin