Substitutability

 

Institution Definition

Measure of the extent to which products may be seen as interchangeable from the viewpoint of producers or consumers. A firm’s pricing policy for a specific product is disciplined if consumers have the possibility to buy another product, which they judge as being equivalent by its nature, use and/or price (demand-side substitution). Additional competitive constraint on the firm may stem from producers of other products capable of switching their production without delay towards the product in question at negligible cost and willing to enter into competition on the market segment concerned (supply-side substitution). Product substitutability is an important element in defining the relevant product market (relevant market).

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