Complementary goods refer to two or more items that are usually consumed simultaneously. Examples are cars and gasoline. We need gasoline as fuel to drive the vehicle.
Complementary products may be part of other items such as a motorcycle and tire or as separate items, such as a car with gasoline.
Because we use them together, an increase in a product’s price will lead to a decrease in not only its demand but also for its complements. For example, when the price of a car goes up, the demand goes down and reduces the quantity of demand for gasoline. That shifts the demand curve to the left.
The opposite effect applies when prices drop.
Examples of complementary goods
- Printer with ink cartridges
- Brush your teeth with toothpaste
- Bread and butter
- DVD players and DVD discs
- Tea and sugar
- Books and pens
- Computer mouse and personal computer
- Computer hardware and software
- Popcorn and film
Because it involves two products, we use cross-price elasticity to find out how responsive the price of complementary goods to the quantity demanded from a product.
Cross elasticity = % change in quantity demanded of item X/% change in the price of item Y
Two complementary products have negative cross elasticity because of the numerator and denominator of the cross elasticity formula point in the opposite direction.
The absolute value of the cross elasticity number tells us how close the consumption of the two products is. In other words, how close the two of them function as complementary. High absolute numbers indicate both are a very tight and responsive complement. An increase in the price of complementary products will significantly reduce product demand.
Effects complementary goods on competition
Complements add value to a product offering when both are used together. They increase sales opportunities for a product, thereby increasing the profit potential of industry or company.
Complementary goods are increasingly important when the value of a business product or service depends on its availability. The toothpaste itself, for example, will not have value without a toothbrush.
Complementary directly affects the profitability of a product in the market. When direct complement does not exist, or develops slowly or is of poor quality, it destroys profitability. Take the case of toothbrushes with toothpaste, the demand for toothpaste will expand when it is also supported by the development of toothbrush products.
To add value to a product, the company should launch a complement. For example, Unilever Indonesia Tbk releases Pepsodent toothpaste as well as Pepsodent toothbrushes because the two add value to each other. That way, it reduces the dependency of product success on products from other companies.
Some complementary products may come from two different companies or industries. For example, Google and Samsung in the gadget industry or Microsoft and Intel in the personal computer industry. Samsung smartphones are more valuable when they come with Google’s Android system installed.
Because of these considerations, some experts argue that Porter’s Five Forces Model is incomplete because it ignores the sixth power, which is complementary products. Complement determines profitability because it affects demand and profitability in many industries, especially in high technology such as the computer and gadget industries.