Benefits of researching the market for substitute goods and services
There are several benefits that accrue to firms and household for researching the market for substitute goods and services. Some of the benefits are highlighted below:
a) Maximise Utility
Rational consumers are always trying to get the best value for their money. Therefore, researching the market for substitute goods and services will help them get the products that achieve this objective. If the price of one commodity increases, such consumers can result to substitutes to continue maximising utility.
b) Make pricing decision
Depending on the type of the market a given firm is operating in, researching for the price of substitute goods can help in determining the prices of given commodities. If the firm wants to increase sales, for instance, it will price its commodities lower than the substitute products.
Cola Wars
It all started in 1959 when Alfred Steele became CEO of Pepsi. His Motto was “Beat Coke.” In 1970, marketing campaign “Pepsi Generation” was launched. In late 1950’s, Coca-Cola advertised as “Americans Preferred Taste”. Other Advertisements included “No Wonder Coke Refreshes Best”. Pepsi launched Teem (1960), Mountain Dew (1964) and Diet Pepsi (1964). Non CSD Pepsi merged with Frito-lay. Coke launched Fanta (1960), Sprite (1961) and Cola Tab (1963). Non CSD Coke purchased Minute maid, Duncan foods and Belmont Springs Water. In 1974 Pepsi launched “Pepsi Challenge” in Dallas and Coke countered with rebates, retail price cuts. Pepsi doubled its advertising expenses and introduced Lemon-Lime Slice (1984) and Caffeine Free Pepsi (1987). In response Coke switched from sugar to high-fructose corn syrup in 1980 and Doubled the advertising expenses. Diet Coke was introduced in 1982. Coke introduced Caffeine Free Coke (1983) and Cherry Coke (1985).
Question
How do firms respond to changes in prices of substitutes? Provide practical examples