Complementary Good Details

A complementary good or service is something used or provided in combination with another good or service. The word complementary means combining to enhance or emphasize each other's qualities.

Usually, a complementary good does not have much value on its own. Still, it increases the value of the overall offering when combined with another product. Products sharing a positive relationship are also considered complementary. Examples include iOs apps with an iPhone and shoelaces with running shoes.

Economically, when the price of a product or good increases, the demand for its complement good decreases because we are unlikely to buy the complementary item on its own. There are complementary goods with weak or strong correlations to each other. Weak correlation means that changes in price or demand for a certain product are less likely to affect the complementary product significantly.

Complementary Goods Example

There are several examples of complementary goods in almost every industry, including healthcare, e-commerce, and food. They can be co-dependent, such as gas and cars, or a preferred pairing such as cereal and milk. Other examples include:

  • Wine and wine glasses
  • Tennis ball and tennis racket
  • Printers and ink cartridges
  • French fries and ketchup
  • Plants and fertilizer

Hot dog buns are considered a strong complementary good to hot dogs. If there is a decrease in hot dog demand, people are less likely to purchase hot dog buns. They may eat hamburgers instead. However, mustard is a weak complementary good to hot dogs because the demand for mustard can remain steady even if people still eat hamburgers.

Significance Of Complementary Goods

Businesses need to understand complementary goods related to their products for better marketing techniques. For example, supermarkets will place complementary goods next to each other to increase sales. They place notebooks, pencils, and pens in the same aisle and tortillas next to beans.

Companies can also price one complementary item cheaper than the other to encourage purchases. For example, a razor is significantly cheaper than its blades, but you cannot shave without the blades.

Additionally, if a company does not produce a complementary product to their main good or service, knowing how the complementary good affects their sales can be crucial. For example, people may choose to drive less if gas prices go up. This price increase can lead to lower demand for car purchases.

Types Of Complementary Goods

The different types of complementary goods refer to the level of cross-elasticity of demand. Weak complementary goods have low cross-elasticity, meaning a change in price for one product will impact its complementary product only marginally. For example, even though coffee and cream are complementary goods, there will be little impact on overall cream consumption if coffee prices rise.

Strong complementary goods have a high cross-elasticity of demand. When one product's price changes, it will significantly impact the complementary product. For example, if iPhone prices increase and people own less iPhone's the demand for iOs apps will also decrease.

Perfect complementary goods are products that require each other. An example is a right shoe and a left shoe. Generally, you purchase shoes in pairs, and the increase in demand for one side will be equal to the change in the other.

Complementary Good vs. Substitute Good

While you can use complementary goods in conjunction with each other, a substitute good is a product or service that satisfies the same purpose. For example, a substitute for an iPhone is a Samsung Galaxy.

When the price of a product increases, becoming less affordable, its substitute product can experience an increase in demand. If iPhone prices increase, people are more likely to purchase a Samsung Galaxy to save money on smartphones.