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Complementary Goods

Reviewed by Annapoorna | Updated on Oct 05, 2020

Catalogue

Meaning of Complementary Goods

An object used in combination with another product or service is a complementary good or service. Usually, when consumed alone, the complementary good has little or no value. Still, when paired with another good or service, it adds value to the overall value of the bid. A product may be considered to be complementary if it shares a beneficial relationship with another product. An ideal example could be a sharpener and eraser given away with a box of pencils.

Complementary Goods Explained

The complementary goods have a nature of joint demand, and it allows interaction since the consumer craves for the second product when the price of the first commodity fluctuates. In economics, this connection is termed as negative cross-elasticity of demand.

Hence, as the product's price rises, the user's demand for the replacement product declines. It is because customers are reluctant to buy the supplement alone. Therefore, the market price of the complementary good or service can decline as consumer demand weakens.

Complementary goods can either be weak ones or strong ones. The weak ones have low cross-elasticity of demand. For instance, if the coffee price rises, it will only have a marginal impact on reducing cream's consumption.

Complementary goods are different from substitute goods, which are different goods or services that satisfy the same consumer needs. The additional products would have a negative cross- elasticity of demand.

If the price of one good increases, the market will decrease for both complementary products. The closer the products are to it, the higher will the cross elasticity of demand be. If they are weak complementary goods, then demand will be low on cross-elasticity.

Complementarity may be driven by psychological mechanisms in which one good's (such as cola) consumption increases the desire for its complements (such as a cheeseburger). Consumption of a food or beverage triggers a target of eating its complements too. Drinking cola raises the ability of customers to pay for a cheeseburger.

Conclusion

Complementary goods add value to their main product. It allows managers to take investment decisions to produce a new product by knowing the prices and demand variations of the supplementary goods.

The combined relationship between the complementary products suggests that it is easier to invest in the production of complementary goods with higher demand products. Alternatively, if the organisations already manufacture a specific good, they are better able to produce their complementary goods.

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