Complementary goods are products which are consumed together.
- Therefore if demand for one good increases the demand for the other will also increase.
- If the price of primary good increases, you would expect a fall in demand for complementary good (negative cross elasticity of demand)
Examples of complementary goods
- Printers – Ink Cartridges
- Tennis balls and tennis rackets.
- Mobile phones and mobile phone credit for making calls.
- Coffee Machines – Coffee Pods
- iPhone and Apps to use with an iPhone.
- Cars and Car insurance
- Car and petrol/tyres
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 the consumption of milk.
However, if the price of Android Phones increases, it will negatively affect sales and therefore reduce demand for Android Apps.
Perfect complements
Goods are perfect complements if you can’t use one good without the other. For example, if you buy printer ink, the good is useless without a printer.
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.
Reducing the price of games consoles, such as Playstation may enable the firm to make more profit on licensed games.
Lock-in effects Many printers are sold quite cheaply because firms that manufacture printers hope to make the most profit on selling compatible ink. In fact, some firms may sell printers at a loss because they think they can then make very high profits on specific cartridges. This is why printers try to stop unlicensed ink cartridges, forcing you to buy the ink cartridges with the heavy mark up.
Related
- Different types of goods
- Substitute goods – the opposite of complementary goods – alternative goods.
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