What defines the substitution effect in pricing?

The substitution effect in pricing is fundamentally defined by the availability of substitute products. This concept refers to how consumers react to changes in the price of a good by considering other products that can serve a similar purpose or satisfy the same need. When the price of a product increases, consumers may seek out available substitutes that are now comparatively cheaper, thus leading to a shift in their purchasing behavior.

Understanding this effect is critical for marketers because it illustrates the sensitivity of demand among consumers based on price changes. If a brand's pricing increases, marketers need to be aware of how many substitutes exist in the marketplace, as this will significantly influence consumer choices and ultimately affect sales and market share. The presence of viable alternatives encourages consumers to evaluate their options, making the assessment of substitutes key in pricing strategies and competitive analysis.