Complementary good

A complementary good or complement good in economics is a good which is consumed with another good; its cross elasticity of demand is negative. – It is two goods that are bought and used together.[1] This means that, if goods A and B are complements, an increase in the demand for good A results in an increase in demand for good B. An increase in the price of A will result in a leftward movement along the demand curve of A and a leftward shift of the demand curve of B; less of each good would be demanded. A decrease in the price of A will result in a rightward movement along the demand curve of A and a shift rightward of the demand curve of B; more of each good would be demanded. An example of this would be the demand for hotdogs and hotdog buns. If the price of hotdogs increases, then fewer hotdog buns would be demanded at any given price given that the total price of the two goods is higher than before. If the price of hotdogs decreases, then more hotdog buns would be demanded at any given price given that the total price of the two goods is lower than before.

A perfect complement is a good that has to be consumed with another good. Many goods in the real world exhibit characteristics close to perfect complementariness. An example would be a left shoe and a right. Because of this, shoes are naturally sold in pairs, and the ratio between sales of left and right shoes will never shift noticeably from 1:1 - even if, for example, someone is missing a leg and buys just one shoe.

The degree of complementariness, however, does not have to be mutual; it can be measured by 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.

A classic example of mutual perfect complements is the case of pencils and erasers. Imagine an accountant who will need to prepare financial statements, but in doing so he or she must use pencils to make all calculations and an eraser to correct errors. The accountant knows that for every 3 pencils, 1 eraser will be needed. Any more pencils will serve no purpose, because he or she will not be able to erase the calculations. Any more erasers will not be useful either, because there will not be enough pencils for him or her to make a large enough mess with in order to require more erasers.

In this case the utility would be given by an increasing function of:

min (number of pencils, 3 × number of erasers)

In marketing, complementary goods give additional market power to the company. It allows vendor lock-in as it increases the switching cost. A few types of pricing strategy exist for complementary good and its base good:

Pricing the base good at a relatively low price to the complementary good - this approach allows easy entry by consumers (e.g. consumer printer vs ink jet 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. golf club membership vs green fees)