What Are Complementary Goods?
A complementary good is one whose usage is directly related to another linked or associated good or a paired good, i.e., we can say two goods are complementary to each other. When the usage of good A enhances or requires the usage of another related good B or, in simpler terms, usage of good A drives the demand for the use of good B.
These are associated with or related to each other and are generally used in conjunction. The demand for one good drives the need for the other. It is generally observed that consumer goodsConsumer GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy. are of very little value when consumed or produced alone. Thus the existence of two or more complementary goods is necessary to bring about the right balance. When consumed or produced together, it adds enhanced value to the offering.
Table of contents
- A complementary good is a product that is directly associated with or paired with another good, and the usage of one good is closely related to the usage of the other.
- Complementary goods have a negative cross-elasticity of demand. This means that if the price of one product increases, the demand for the associated complementary goods decreases. Consumers may choose to use the product individually rather than in conjunction with the complementary good.
- Due to the negative cross-elasticity of demand, an increase in the price of one complementary good leads to a decrease in the demand for the other.
Complementary Goods Explained
Two products are called complementary goods in economics when each one shares a beneficial relation, for example, mobile phone and mobile cover. Both cannot exist alone, and thus each one plays a role in the value offering.
The complementary goods graph, on the other hand, has a negative cross elasticity of demandCross Elasticity Of DemandCross Price Elasticity of Demand measures the relationship between price and demand. Change in quantity demanded by one product with a change in price of the second product, where if both products are substitutes, it will show a positive cross elasticity of demand. which means if the price of one product significantly increases, the demand for the related consumer goods tends to fall as due to increase of the price of one product, consumers will prefer using it alone and not complementing it with another good or product.
In addition to this, as consumer demand for such goods or products falls, the price in the market for the complementary goods or services also tends to decline.
It is also worth noting that being complementary, the demand of one will also influence the other. If the demand for one falls, the demand for the related complementary goods will also fall. This also proves the point that the if the consumption of one increases, the consumption of the other will also increase, establishing a positive relation between themselves.
These types of goods work together to meet a particular and common need of consumers and in the process, increase the use of each other. From the business point of view, this concept is extremely helpful because based on it, the management can estimate and fix the prices of goods and services which work in conjunction with other goods complementary to them. They can also design marketing strategies and develop techniques and methods to gain and increase customer base.
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Let us understand the concept of complementary goods in economics with the help of some examples as given below:
- One very common example is wine and wine glasses. A person buying a bottle of wine will always prefer to have the drink in a traditional wine glass, and thus both are interrelated to its consumers who take both the products as complementary goods.
- ·Another example of complementary goods is a torch and battery. A torch powered by batteries is useless unless we use the battery in it, and thus both products exist with the help of each other and are not worth it if each one of them is not produced or supplied in the market.
- Razor and blade can also be considered classic examples because a razor requires constant replacement of the blades with its usage over a certain period, and both products exist with the support of each other.
Looking at the above examples it is very clear that these types of products are totally dependent on each other. According to the complementary goods graph one cannot work without the other. Therefore when consumers purchase one of them, they always purchase the product that is complementary to it so that both con be used comfortably.
How Firms Use Complementary Goods?
As we know, complementary goods are related to each other, and each good is deemed useless without the usage or consumption of the other. Firms are very smart in designing their product, and thus marketing happens so that consumers are bound to shed money even when the company says that goods are available at a discount.
An example of perfect complementary goods can be an instant camera, which is marketed by a few companies and is sold in the market for only $40. Consumers may think that a camera that provides a snap instantly at only $40 may be a good deal, but there is a catch to it.
The camera comes with an additional photo roll where the photo taken gets printed. The price of each photo roll, which can print 12-15 photos, is $20. So after every 12-15 photos, the consumers have to shell out $20.
It is where such companies are making use of complementary goods. One hand giving a product as cheap as $40, the complementary good that makes the camera usable is priced at a higher-end based on every use.
- Perfect complementary goods possesses a negative cross elasticity of demand where increasing the price of one good brings down the demand of the other. These are usually consumed together, and thus fluctuation in prices of complementary goods will generally shift the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal..
- When the price of one good decreases, the demand for its quantity increases, and thus the demand for the other also increases. When two products are complemented, they experience what we call a joint demand.
- For example, the demand for razor blades depends on the number of razors a consumer uses, which is why razors are being sold at a loss to increase the demand for the blades which proves the elasticity of complementary goods.
Complementary Goods Vs Substitute Goods
Both the above are two different concepts in economics in the goods and services market. They clearly explain how various products in the market are linked to each other in terms of taste and preference of consumers.
- Complementary goods are consumed together, which is used to enhance of increase the value of each other, whereas substitute goods are the ones that fulfill a common want and can be used interchangeably to meet the same type of need.
- When a product price increases, the demand for complementary goods decreases, whereas the demand for the product’s substitute increases. This is because if the price increase, people will prefer to switch to a better or cheaper option available in the market, which is a substitute.
- Substitute goods are more like competitors in the markets, whereas complementary goods are more associated with products. An example of a substitute good can be Coke and Pepsi, whereas a complement good is the razor and the blades. Substitute goods have an inverse relationship, whereas complementary goods are positively associated with one another. Thus the cross elasticity of complementary goods are negative.
Thus, the differences in the above two types of goods are mainly form the point of view of how much they are available in the market and to what extent the changes or fluctuations in prices affect the dependence of one on another.
Frequently Asked Questions (FAQs)
Yes, changes in technology can impact the demand for complementary goods. Technological advancements can introduce new complementary goods or alter the compatibility between existing ones. As technology evolves, the demand for complementary goods can shift as consumers adapt to new ways of consuming products or services.
Complementary goods do not always have to be purchased together. While they are commonly used together, consumers have the flexibility to purchase them separately. The concept of complementary goods lies in their mutually reinforcing nature, where one product’s consumption or use enhances another’s value or utility.
Complementary goods play a significant role in cross-selling and bundling strategies. Cross-selling involves promoting additional complementary products to customers to increase their overall purchase value. For example, a phone manufacturer may cross-sell phone cases or accessories. Bundling involves packaging complementary goods together as a single offering, such as a combo meal at a fast-food restaurant. Both strategies aim to leverage the connection between complementary goods to enhance customer satisfaction, increase sales, and create a more comprehensive product experience.
This has been a guide to what Are Complementary Goods. We explain it with example, differences with substitute goods, their demand and how firms use them. You can learn more about from the following articles –