Meaning of Complementary Goods
An object combined 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 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, allowing interaction since the consumer craves the second product when the price of the first commodity fluctuates. In economics, this connection is termed a negative cross-elasticity of demand.
Hence, as the product's price rises, the user's demand for the replacement product declines. This 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 coffee prices rise, it will only have a marginal impact on reducing cream consumption.
Complementary goods are different from substitute goods, which are different goods or services that satisfy the exact consumer needs. The additional products would have a negative cross-elasticity of demand.
If the price of one good increases, the market for both complementary products will decrease. The closer the products are to each other, the higher the cross-elasticity of demand will 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 complements (such as a cheeseburger). Consumption of a food or beverage triggers a target of eating its complements, too. Drinking cola raises customers' ability to pay for a cheeseburger.
Strong and Weak Complementary Goods
Strong complements are very interdependent, in that the demand for one is strongly dependent on the price or availability of the other. If one is not available, the other is made virtually useless. For example, printers and ink cartridges are strong complements because a printer is essentially useless without ink.
Weak complementary goods are products that are consumed jointly but do not rely on one another heavily. Altering the price or availability of one does not affect the demand for the other considerably. For example, coffee and sugar are weak complements because when the cost of sugar increases, individuals can still use coffee with alternatives such as honey or artificial sweeteners.
Examples Of Complementary Goods
- Ink Cartridges and Printers: A printer is nothing without ink.
- Cars and Fuel: Vehicles need fuel, making them highly interdependent.
- Gaming Discs and Consoles: The console is useless without the game discs or digital downloads.
- Bread and Butter: Usually eaten side by side, but it's possible to get by without either.
- Coffee and Sugar: Sugar adds flavour to coffee, although numerous consume coffee without sugar.
- Movies and Popcorn: A favourite combination, but neither can be enjoyed alone.
Conclusion
Complementary goods add value to the main product. Knowing the prices and demand variations of the supplementary goods allows managers to make investment decisions to produce a new product.
The combined relationship between the complementary products suggests that investing in producing complementary goods with higher-demand products is more effortless. Alternatively, organisations that already manufacture a specific good are better able to produce complementary goods.
