Complementary Goods 2020-09-21 08:00:00

Complementary Goods

Complementary goods create value when used together but offer little to no value when used alone. An example is hamburger patties and buns. Consumers will often purchase them together. As stand alone products, they don’t offer much value. Additionally, if the price of one complimentary product increases, such as hamburger patties, sales in the other related product (buns) will decrease, along with sales of hamburger patties.

This relationship between the two goods is also referred to as the joint demand nature of the two products. The formal terminology for the relationship is called cross-elasticity. As demand for one of the complementary products increases, so does the demand for the other product and vice versa as demand falls.

There are two types of cross-elasticity for complementary goods — weak and strong. Strong elasticity is as described above, where there is close to a 1-to-1 relationship between the two products. Weak elasticity means that as demand for one product decreases, it doesn’t have as much impact on the other product. For example, if the price of coffee rises and demand falls, it doesn’t affect the demand for creamer, since there are many uses for creamer outside of coffee. Even though coffee and creamer are complementary goods, creamer is a complementary good for many other products.

Complementary goods can also be affected by price changes in competing products. If the price of steak decreases, sales of hamburger patties and buns will both decrease, as they are seen as inferior goods compared to steak.

Complementary goods shouldn’t be confused with substitute goods. Substitute goods are different products or services that satisfy the same consumer need. The iPhone and Samsung phones are different products. If the price for one phone increases, consumers may switch to the other to satisfy their mobile communication needs.

 


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