What are Complementary Goods?
A complementary good is one whose usage is directly related to the usage of 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 term usage of good A drives the demand for the use of good B.
Short Description
These are associated with or related to each other. The demand for one good drives the need for the other. They are generally used in conjunction with one another. It is generally observed that when consumed or produced alone, consumer goods are of very little value.
Thus the existence of two or more complementary goods is very necessary to bring about the right balance. When consumed or produced together, it adds enhanced value to the offering. Two products are termed as complementary when each one shares a beneficial relation with each other, for example, mobile phone and mobile cover. Both cannot exist alone, and thus each one plays a role in the value offering.
Complementary good, 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.read more 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 product falls, the price in the market for the complementary good or services also tends to see a decline.
Complementary Goods Examples
- 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 each other to its consumers who take both the products as complementary goods.
- Another example of complementary goods is torch and battery. A torch that is 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 it is not produced or supplied in the market.
- Razor and blade can also be considered a classic example because a razor requires constant replacement of the blades with its usage over a certain period of time, and both the product exists with the support of each other.
How Firms Use Complementary Goods?
As we know, complementary goods are related to each other, and each good is deemed to be useless without the usage or consumption of the other. Firms are very smart to design their product, and thus marketing happens in such a way that consumers are bound to shed money even when the company says that goods are available at a discount.
An example of this 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, and that 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 on. 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.
This is where such companies are making use of complementary goods and wherein one hand giving a product as cheap as $40, the complementary good which makes the camera usable is priced at a higher-end based on every single use.
Demand
- It 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.read more too.
- When the price of one good decreases, the demand for the quantity of it increases, and thus the demand for the other also increases. When two products are complements, they experience what we call a joint demand.
- This is why for example, the demand for razor blades is dependent on the number of razors a consumer uses, and this is why at times, razors are being sold at a loss to increase the demand for the blades.
Complementary Goods vs. Substitute Goods
- Complementary goods are consumed together whereas substitute goods are the ones which fulfill a common want. When a product price increases, the demand for complementary good decreases, whereas the demand for the product’s substitute increases.
- Substitute goods are more like competitors in the markets, whereas complementary goods are more of associated products. An example of a substitute good can be Coke and Pepsi, whereas an example of a complement good is the razor and the blades. Substitute goods have an inverse relationship with each other, whereas complementary goods are positively associated with one another.
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