In order to continue enjoying our site, we ask that you confirm your identity as a human. Thank you very much for your cooperation.
In economics, a complementary good is a good whose appeal increases with the popularity of its complement.[further explanation needed] Technically, it displays a negative cross elasticity of demand and that demand for it increases when the price of another good decreases.[1] If
A
{\displaystyle A}
When two goods are complements, they experience joint demand - the demand of one good is linked to the demand for another good. Therefore, if a higher quantity is demanded of one good, a higher quantity will also be demanded of the other, and vice versa. For example, the demand for razor blades may depend on the number of razors in use; this is why razors have sometimes been sold as loss leaders, to increase demand for the associated blades.[3] Another example is that sometimes a toothbrush is packaged free with toothpaste. The toothbrush is a complement to the toothpaste; the cost of producing a toothbrush may be higher than toothpaste, but its sales depends on the demand of toothpaste.
All non-complementary goods can be considered substitutes.[4] If
x
{\displaystyle x}
Complementarity may be driven by psychological processes in which the consumption of one good (e.g., cola) stimulates demand for its complements (e.g., a cheeseburger). Consumption of a food or beverage activates a goal to consume its complements: foods that consumers believe would taste better together. Drinking cola increases consumers' willingness to pay for a cheeseburger. This effect appears to be contingent on consumer perceptions of these relationships rather than their sensory properties.[5]
Examples
An example of this would be the demand for cars and petrol. The supply and demand for cars is represented by the figure, with the initial demand
D
1
{\displaystyle D_{1}}
Perfect complement
A perfect complement is a good that must be consumed with another good. The indifference curve of a perfect complement exhibits a right angle, as illustrated by the figure.[6] Such preferences can be represented by a Leontief utility function.
Few goods behave as perfect complements.[6] One example is a left shoe and a right; shoes are naturally sold in pairs, and the ratio between sales of left and right shoes will never shift noticeably from 1:1.
The degree of complementarity, however, does not have to be mutual; it can be measured by the cross price elasticity of demand. In the case of video games, a specific video game (the complement good) has to be consumed with a video game console (the base good). It does not work the other way: a video game console does not have to be consumed with that game.
Example
In marketing, complementary goods give additional market power to the producer. It allows vendor lock-in by increasing switching costs. A few types of pricing strategy exist for a complementary good and its base good:
- Pricing the base good at a relatively low price - this approach allows easy entry by consumers (e.g. low-price consumer printer vs. high-price cartridge)
- Pricing the base good at a relatively high price to the complementary good - this approach creates a barrier to entry and exit (e.g., a costly car vs inexpensive gas)
Gross complements
Sometimes the complement-relationship between two goods is not intuitive and must be verified by inspecting the cross-elasticity of demand using market data.
Mosak's definition states "a good of
x
{\displaystyle x}
is a gross complement of
y
{\displaystyle y}
if
∂
f
x
(
p
,
ω
)
∂
p
y
{\displaystyle {\frac {\partial f_{x}(p,\omega )}{\partial p_{y}}}}
Proof
The standard Hicks decomposition of the effect on the ordinary demand for a good
x
{\displaystyle x}
of a simple price change in a good
y
{\displaystyle y}
, utility level
τ
∗
{\displaystyle \tau ^{*}}
∂
f
x
(
p
,
ω
)
∂
p
y
=
∂
h
x
(
p
,
τ
∗
)
∂
p
y
−
y
∗
∂
f
x
(
p
,
ω
)
∂
ω
{\displaystyle {\frac {\partial f_{x}(p,\omega )}{\partial p_{y}}}={\frac {\partial h_{x}(p,\tau ^{*})}{\partial p_{y}}}-y^{*}{\frac {\partial f_{x}(p,\omega )}{\partial \omega }}}
If
x
{\displaystyle x}
is a gross substitute for
y
{\displaystyle y}
, the left-hand side of the equation and the first term of right-hand side are positive. By the symmetry of Mosak's perspective, evaluating the equation with respect to
x
∗
{\displaystyle x^{*}}
Effect of price change of complementary goods
- Substitute good
References
- ^ Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach. Cengage Learning. p. 35. ISBN 978-0-324-31461-8.
- ^ O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 88. ISBN 0-13-063085-3.
- ^ "Customer in Marketing by David Mercer". Future Observatory. Archived from the original on 2013-04-04.
- ^ Newman, Peter (2016-11-30) [1987]. "Substitutes and Complements". The New Palgrave: A Dictionary of Economics: 1–7. doi:10.1057/978-1-349-95121-5_1821-1. ISBN 978-1-349-95121-5. Retrieved 2022-05-26.
- ^ Huh, Young Eun; Vosgerau, Joachim; Morewedge, Carey K. (2016-03-14). "Selective Sensitization: Consuming a Food Activates a Goal to Consume its Complements". Journal of Marketing Research. 53 (6): 1034–1049. doi:10.1509/jmr.12.0240. ISSN 0022-2437. S2CID 4800997.
- ^ a b Mankiw, Gregory (2008). Principle of Economics. Cengage Learning. pp. 463–464. ISBN 978-0-324-58997-9.
- ^ Mosak, Jacob L. (1944). "General equilibrium theory in international trade" (PDF). Cowles Commission for Research in Economics, Monograph No. 7. Principia Press: 33.
Retrieved from "//en.wikipedia.org/w/index.php?title=Complementary_good&oldid=1122981131"