Complementary Goods

Introduction

Complementary goods, as the name suggests, are those goods that are closely related to one another. Without the presence of one good, the other seems of no use. Have you ever wondered why you buy bread and butter simultaneously or why ink cartridges are sold with printers? The idea of complementary goods holds the key to the solution. Products or services that are dependent on one another are referred to as complementary goods.

Fig 1: Complementary Goods

Define Complementary Goods

Goods and services typically used in tandem are known as complementary goods. When the consumption of one good rises, the consumption of the other good will follow. It is because the two goods possess a positive cross-price elasticity of demand, meaning that a change in the cost of one good affects the demand for the other good.

Overview of Complementary Goods

Complementary goods are frequently used in conjunction to fulfil a shared need or desire. Because they are commonly consumed together, bread and butter, for instance, are complementary goods. Similarly, since using one requires using the other, a printer and printer ink are complementary goods. The functionality of one depends on the other, as both are inter-related to one another.

Joint-demand complementary goods and composite complementary goods are the two main categories of complementary goods. Complementary products with a shared demand are those that are used and consumed at the same time. Say, peanut butter and jelly sandwich are joint-demand complementary goods.

Complementary products used in conjunction but consumed at different times are called composite products. For instance, the razor is used first and the blades are used over time, razor and razor blades are apt examples of composite complementary goods.

Using Complementary Goods

Both businesses and customers can benefit from using complementary products to maximize the value of their purchases. Explore how complementary goods can be used through marketing strategies, upselling, price discrimination, convenience, and subsidization.

Marketing Strategies

Businesses can use complementary goods to boost demand for its related goods. For instance, a company that sells printers might package them with printer ink cartridges to promote interest in both goods.

Fig 2: Marketing Strategies and Upselling Techniques

Upselling

This is another strategy used by businesses to boost their sales revenue. For instance, a restaurant might offer its patrons an upgrade to dessert once they have finished their meal.

Price Discrimination

This strategy charges different prices to different consumer groups. It takes demographic characteristics into consideration for valuing the price. For instance, a theme park may have different entry fees for various age groups..

Convenience

Here, consumers might buy related products together, as one good is tied up to the other. For instance, a person who buys a new phone also buys a protective case and screen protector.

Subsidisation

Complementary goods can be used to subsidise a product's price. A car company, for example, may sell cars at a low price but charge a premium for car accessories such as GPS or sound systems.

Demand for Complementary Goods

For complementary goods, the demand curve slopes downward. It implies that as the cost of one complementary good rises, fewer people will buy the other complementary goods. Similarly, as the cost of one complementary good drops, so does the demand for both complementary goods.

A decrease in the price of complementary goods increases demand for the given commodity and vice versa. For example, if the cost of a complementary good (say, petrol) falls, demand for a given commodity (say, a car) rises, causing the demand curve to shift to the left or right.

Difference between complementary goods and substitutes

It's common to mistake complementary goods for substitutes. The two, however, differ greatly from one another. Some of the distinctions between complementary products and substitutes are outlined in the table below.

Complementary Goods	Substitute Goods
These goods are usually paired up and used together by the consumers.	These goods are generally interchangeable and hence, they can be used in place of each other.
It exhibits a negative cross-price elasticity of demand.	It exhibits a positive cross-price elasticity of demand.
As both goods are used together, a hike in the price of one good can decrease the demand for both goods.	As these goods are interchangeable, as one good's price rises, demand for the other goods also rises.
The types of goods most in demand are generally joint and composite.	These types of goods are generally demanded individually.
The most common example of these goods are bread and butter.	The most common examples of these goods are Coke and Pepsi.

Examples of Complementary Goods

                                              Fig 3: Substitutes and Complementary Goods

Example 1: Peanut Butter and Jelly

Examples of complementary goods with a shared demand include peanut butter and jelly. The consumption of one increases the consumption of the other because they are frequently consumed together in a sandwich.

Example 2: Printer and Printer Ink

Composite complementary goods include printers and ink. The ink is first used on the printer and eventually runs out. The other becomes more popular as a result of the first's consumption.

Example 3: Video Game Console and Games

Other examples of complementary goods include video game consoles and games—the demand for the other increases due to the consumption of the first. For instance, if someone buys a PlayStation console, they will probably also buy PlayStation games to play on the console.

Conclusion

Complementary goods is one of the key concepts in economics. Products or services with a negative cross-price elasticity of demand are complementary. These goods are further divided into composite complementary goods and joint demand complementary goods. Marketing tactics, upselling, price discrimination, convenience, and subsidisation can all be employed with complementary goods.

FAQs

Q1. Can complementary goods ever become substitutes?

Ans. It is possible for goods to change from being complementary to becoming a substitute due to advancements in technology or shifting consumer preferences, even though complementary goods and substitutes are distinct concepts.

Q2. How do complementary goods differ from substitutes?

Ans. The price and demand relationship of complementary goods is direct, whereas, for substitutes, it’s an inverse relationship. While the demand for complementary goods is competitive in nature, it’s joint demand in case of substitutes.

Q3. How are complementary goods used in marketing strategies?

Ans. By bundling a complementary good with another complementary good, complementary goods can be used to increase the demand for a product. Businesses frequently employ this strategy to increase sales revenue.