Complementary good

In economics, a complementary good is a good whose appeal increases with the popularity of another good, its complement. 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} is a complement to B {\displaystyle B} , an increase in the price of A {\displaystyle A} will result in a negative movement along the demand curve of A {\displaystyle A} and cause the demand curve for B {\displaystyle B} to shift inward; less of each good will be demanded. Conversely, a decrease in the price of A {\displaystyle A} will result in a positive movement along the demand curve of A {\displaystyle A} and cause the demand curve of B {\displaystyle B} to shift outward; more of each good will be demanded. This is in contrast to a substitute good, whose demand decreases when its substitute's price decreases.^[2]

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} and y {\displaystyle y} are rough complements in an everyday sense, then consumers are willing to pay more for each marginal unit of good x {\displaystyle x} as they accumulate more y {\displaystyle y} . The opposite is true for substitutes: the consumer is willing to pay less for each marginal unit of good " z {\displaystyle z} " as it accumulates more of good " y {\displaystyle y} ".

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]

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}} . Suppose that the initial price of cars is represented by P 1 {\displaystyle P_{1}} with a quantity demanded of Q 1 {\displaystyle Q_{1}} . If the price of petrol were to decrease by some amount, this would result in a higher quantity of cars demanded. This higher quantity demanded would cause the demand curve to shift rightward to a new position D 2 {\displaystyle D_{2}} . Assuming a constant supply curve S {\displaystyle S} of cars, the new increased quantity demanded will be at Q 2 {\displaystyle Q_{2}} with a new increased price P 2 {\displaystyle P_{2}} . Other examples include automobiles and fuel, mobile phones and cellular service, printer and cartridge, among others.

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.

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)

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 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}}}} is negative, where f i ( p , ω ) {\displaystyle f_{i}(p,\omega )} for i = 1 , 2 , … , n {\displaystyle i=1,2,\ldots ,n} denotes the ordinary individual demand for a certain good." In fact, in Mosak's case, x {\displaystyle x} is not a gross complement of y {\displaystyle y} but y {\displaystyle y} is a gross complement of x {\displaystyle x} . The elasticity does not need to be symmetrical. Thus, y {\displaystyle y} is a gross complement of x {\displaystyle x} while x {\displaystyle x} can simultaneously be a gross substitutes for y {\displaystyle y} .^[7]

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 ^{*}} and chosen bundle z ∗ = ( x ∗ , y ∗ , … ) {\displaystyle z^{*}=(x^{*},y^{*},\dots )} is

∂ 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^{*}} , the first term of right-hand side stays the same while some extreme cases exist where x ∗ {\displaystyle x^{*}} is large enough to make the whole right-hand-side negative. In this case, y {\displaystyle y} is a gross complement of x {\displaystyle x} . Overall, x {\displaystyle x} and y {\displaystyle y} are not symmetrical.

• Substitute good