Complementary good

A complementary good or service is one that is not normally used independently, but rather in conjunction with another product or service. On its own, the complementary product usually has little or no value. However, when combined with another good or service, it has a reason to exist and increases the total value of the offer, enhancing its qualities. A product is considered complementary if it has a mutually beneficial connection with another product, as is the case with ink cartridges and printers (Moradi, 2021). If it is true that complementary goods or services reinforce each other, the opposite can also happen, with a negative cross-elasticity of demand between them, that is: if one product falls into disuse, the demand for its complementary products will have a negative impact, as happened with turntables and vinyl records. The same happens if there is a shortage in supply and/or an exponential price increase of one of the complementary goods.

Weak vs strong complementary goods

Considering their relationship, we can differentiate complementary goods as weaker or stronger, in other words, goods that have a lower or higher correlation (Gabszewicz, Sonnac and Wauthy, 2000). When the price of chargers increases by 10%, but the demand for cell phones only falls by 1%, we are faced with a correlation in which the complementary good is weak, in that the price increase of the complementary good does not proportionally influence the demand for the primary good. Conversely, a complementary good is stronger the greater its relationship with the principal, that is: when it is not possible to use the products individually, as is the case of the DVD player and DVDs. In this case, the relationship between strong complementary goods is very elastic, in that when the price of one product increases, the demand for the complementary good falls.

Production of complementary goods

To be able to decide as adequately as possible, in the case of existing complementary products or services, business managers need to know the market, the current and potential supply and demand, the market values and their variations, as well as the customer profile and the existing competition in the sector. However, if the decision is to produce a complementary product that does not yet exist in the market, initially a research has to be done, in order to know the market properly (politically, economically and socially) and the profile of potential customers (their tastes and financial capacity), in order to produce and/or market products or services that meet or arouse needs, making it possible to achieve the expected results. Thus, it is essential that investment in complementary goods, production and/or marketing, be made in products that have greater demand (Moradi, 2021).

Advantages and disadvantages of complementary goods

To better understand the market for complementary goods and the relevance of investing in products that depend in whole or in part on others, it is important to consider their advantages, but also be aware that there are disadvantages.

Regarding the first one, we can say that this is the case (Yalcin et al 2010):

• Since the purchase of the complementary product will depend on the purchase of the main product, it is easier to determine its demand.
• Lower investment in advertising. It is not necessary to elaborate advertising campaigns for complementary goods, since the customer of the main product will necessarily have to buy the complementary product.
• The possibility that the company produces both the main product and the complementary product makes it easier for the consumer to buy, because he can buy everything related to the product in the same company, making it possible for the company to obtain greater profits on the sale (Matutes and Regibeau, 1992).

Disadvantages of investing in the production of complementary goods:

• High dependency between the products, where there is a decrease in demand for the complementary product if you increase the price of the main product (Moradi, 2021).
• Distinct qualities between complementary products. As these products can be produced by different companies, the expected quality may not converge with the real one, originating an unconsistent complementarity (Yalcin et al 2010).

Complementary good conclusion

In conclusion, it is important to realize that complementarity between goods is increasing as a result of globalization and interdependence between markets, with associated advantages and disadvantages. Moreover, this is a very diversified market and cuts across all sectors, with a greater or lesser correlation between products, which leads to a greater or lesser interdependence between them.

References

• Gabszewicz, J., Sonnac, N., & Wauthy, X. (2000).On price competition with complementary goods. Economics Letters. 70.
• Matutes, C., & Regibeau, P. (2000). Compatibility and Bundling of Complementary Goods in a Duopoly. The Journal of Industrial Economics, 40(1).
• Moradi, S. (2021). Influencing Customer Demand. CRC Press.
• Yalcin, T., Ofek, E., Koenigsberg, O., & Biyalogorsky, E. (2010). Complementary Goods: Creating and Sharing Value.

Author: Ana Inês Jorge Gonçalves, Inês Espregueira Guerra Teixeira de Morais, Marta Gomes Ribeiro