Substitution effect
DESCRIPTION
An effect of a price change that causes a consumer to purchase another good of similar utility as a substitute for a good that becomes comparatively more expensive. More generally, any effect on buyer behavior resulting from the availability of substitutes for a good.
An effect of a price change that causes a consumer to purchase another good of similar utility as a substitute for a good that becomes comparatively more expensive. More generally, any effect on buyer behavior resulting from the availability of substitutes for a good.
KEY INSIGHTS
The substitution effect suggests that, as the price of a product or service rises, a consumer will tend to shift purchases to substitute products or services of similar utility to the consumer in its place. While the availability of substitute products or services enables the consumer to switch, the costs associated with switching are also a factor that must be taken into consideration. When switching costs are low and when there are multiple substitutes available that provide consumers with similar utility to the original product or service, substitution effects may be most pronounced.
The substitution effect suggests that, as the price of a product or service rises, a consumer will tend to shift purchases to substitute products or services of similar utility to the consumer in its place. While the availability of substitute products or services enables the consumer to switch, the costs associated with switching are also a factor that must be taken into consideration. When switching costs are low and when there are multiple substitutes available that provide consumers with similar utility to the original product or service, substitution effects may be most pronounced.
KEYWORDS Substitute product(s), price changes
IMPLICATIONS
Marketers involved in setting prices and managing price changes should seek to understand how and to what extent price changes may lead consumers to shift to substitute products. As many products or services do not have perfect substitutes, understanding in what way other products or services are substitutes (e.g. in form and function) may also be beneficial to marketers considering price changes.
Marketers involved in setting prices and managing price changes should seek to understand how and to what extent price changes may lead consumers to shift to substitute products. As many products or services do not have perfect substitutes, understanding in what way other products or services are substitutes (e.g. in form and function) may also be beneficial to marketers considering price changes.
APPLICATION AREAS AND FURTHER READINGS
Consumer Behavior
Allenby, Greg M., and Rossi, Peter E. (1991). ‘Quality Perceptions and Asymmetric Switching between Brands,’ Marketing Science, 10(3), Summer, 185–204.
Allenby, Greg M., and Rossi, Peter E. (1991). ‘Quality Perceptions and Asymmetric Switching between Brands,’ Marketing Science, 10(3), Summer, 185–204.
Huber, Joel, and Puto, Christopher (1983). ‘Market Boundaries and Product Choice: Illustrating Attraction and Substitution Effects,’ Journal of Consumer Research, 10(1), June, 31–44.
Johnson, W. C., and Bhatia, K. (1997). ‘Technological Substitution in Mobile Communications,’ Journal of Business and Industrial Marketing, 12(5–6), 383–399.
BIBLIOGRAPHY
Walters, Rockney G. (1991). ‘Assessing the Impact of Retail Price Promotions on Product Substitution, Complementary Purchase, and Interstore Sales Displacement,’ Journal of Marketing, 55(2), April, 17–28.
Walters, Rockney G. (1991). ‘Assessing the Impact of Retail Price Promotions on Product Substitution, Complementary Purchase, and Interstore Sales Displacement,’ Journal of Marketing, 55(2), April, 17–28.
sundown rule see marketing, rules of
sunk cost see cost
sunk cost see cost