Complementary goods are products which are used together. For example:
- DVD player and DVD disks to play in it.
- Tennis balls and tennis rackets.
- Mobile phones and mobile phone credit for making calls.
- iPhone and Apps to use with an iPhone.
- Petrol and car.
Complementary Goods and Cross Elasticity of Demand
Complementary goods will have a negative cross elasticity of demand. If the price of one good increases, demand for both complementary goods will fall. The more closely linked the goods are, the higher will be the cross elasticity of demand.
If they are weak complementary goods then there will be a low cross elasticity of demand. For example, if the price of tea increases it will only have a marginal impact on reducing demand for tea and consumption of milk.
However, if the price of Android Phones increases, it will negatively affect sales and therefore reduce demand for Android Apps.
How firms make use of complementary goods
Increase related sales. Supermarkets will place related food items close to each other. For example, next to pasta – expensive pasta sauces. The firm hopes to increase overall sales by suggesting possible related complementary goods.
Gain loyal consumers to make related sales. Another strategy a firm can implement is to offer a base product at a low price, knowing that if consumers buy ‘base product’ they can increase sales of related (and profitable) add-on items. For example, the owners of PlayStation have an incentive to cut the price of the PlayStation itself. If they do, they know they will make increases sales of licensed games, and this increase in revenue will offset the fall in revenue from a lower price.