Question

The threat from substitutes is high when: a. switching costs are high. b. the substitute product's price is lower than the industry product's price. c. the quality of the substitute product is lower than the quality of the industry's product. d. the substitute product stimulates new process innovations within the industry.

Answer 1

The correct answer is letter "B": the substitute product's price is lower than the industry product's price.

Step-by-step explanation:

Threats are all external factors that potentially represent a disadvantage for firms. When it comes to competition between companies, if one of them decides to set the price of their goods or services below the industry's standard, the scenario represents a threat for the competitors since consumers are price-driven which means more of them will prefer to purchase the products of the company offering at lower prices.

Answer 2

Option (b) is correct.

Step-by-step explanation:

Substitute goods refers to the goods which are having positive cross price elasticity of demand. This means that there is a direct relationship between the price of one good and the quantity demanded for its substitute good.

Therefore, the threat from substitutes is high when the price of substitute is lower the price of particular good because by offering a lower price for the same product induces consumers to buy product from this seller.

The substitute goods are having the similar characterstics and provide same level of satisfaction. That's why the consumers easily switch to the product with a lower price.