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Substitution between Domestic and Foreign Goods

Substitution between domestic and foreign goods and services has reached an all time high in the
world and is expected to continue to increase sharply. For homogenous products such as a
particular grade of wheat and steel, and for many industrial products with precise specifications
such as computer chips, fiber optics, and specialized machinery, substitutability between
domestic and foreign products is almost perfect. Here, a small price difference can lead quickly
to large shifts in sales from domestic to foreign sources and vice versa. Even for differentiated
products , such as automobiles and motorcycles, computers and copiers, watches and cameras,
TV films and TV programs, soft drinks and cigarettes, soaps and detergents, commercial and
military aircraft, and most other products that are similar but not identical, substitutability
between domestic and foreign products is very high and rising.
Despite the quality problems of the past, U.S.-made automobiles today are highly
substitutable for Japanese and European automobiles, and so are most other products.
Furthermore, with many parts and components imported from many nations and with production
facilities and sales around the world often exceeding sales at home, even the distinction between
domestic and foreign products is fast becoming obsolete. Should a Honda Accord produced in
Ohio be considered American? What about a Chrysler minivan produces in Canada, especially
now that Chrysler is owned by Germanys Daimler Benz? Is a Kentucky Toyota or Mazda that
contains nearly 50 percent Japanese parts American? It is clearly becoming more difficult to
define an American automobile, even after the American Automobile Labeling Act of 1992,
which requires all automobiles sold in United States to indicate what percentage of the cars parts
are domestic or foreign. Indeed, one could even ask if the question is relevant in a world growing
more and more interdependent and globalized.
Hot Points:
1. Competitiveness
2. Quality
3. Global Demand
4. Substitution
5. Interdependence
6. Outsourcing
7. Demand shifts.
Analyze the following questions Q1. Does substitutability contribute to cost and quality effectiveness? If so, how?
Q2. Is substitutability a factor responsible for generating global competitiveness?
Q3. Substitutability between domestic and foreign goods may undermine brand value of a
product. Appraise.
Q4. Globalisation is a main driver of demand for substitutes from global quarters. Elucidate.

Case Study 2
Assuming that you are a Manager in a Firm, how would you go about pricing your product in
following situations:
1. Consumers demand governing your finished product is elastic, supply governing
manufacturing of your product is inelastic.
2. Consumers demand governing your finished product is inelastic, supply governing your
manufacturing of the product is elastic.
3. Both demand and supply is elastic.
4. Both demand and supply is inelastic.
Hot Points:
1. Consumers demand
2. Suppliers response
3. Price elastic.
4. Supply constraint.
What is expected from the student?
1. The student is expected to visualize a situation wherein he is expected to take a decision
under the above mentioned circumstances. He needs to justify the answer regarding his
pricing decisions.
2. Clarity is expected from the student in terms of what is meant by elastic demand and
what is meant by inelastic supply.
3. Student is expected to answer the question in terms of --- high price, moderately high
price, low price, etc.