Let's Break It Down - Complementary Goods

Introduction

Some products just go together, like peanut butter and jelly, cars and gas, or game consoles and video games. In economics, these are called complementary goods, and understanding them helps explain many business decisions.

What Are Complementary Goods?

Complementary goods are products that are often used together. When the price of one goes up, people tend to buy less of both. For example, if gas prices rise sharply, people may drive less and some may delay buying large cars that use a lot of fuel.

How Businesses Use This

Companies often price complementary goods strategically. Printer companies sometimes sell printers cheaply and make money on ink cartridges. Video game console makers may sell consoles at low profit margins and earn more from games and subscriptions. Movie theaters keep ticket prices competitive but charge more for popcorn and drinks.

Complements vs. Substitutes

Complementary goods are the opposite of substitute goods. Substitutes replace each other, like Coke and Pepsi. Complements are used together. Economists measure these relationships using cross-price elasticity, which shows how demand for one product changes when the price of another changes.

Conclusion

Complementary goods are all around you, from your phone and charger to your cereal and milk. Once you notice them, you will start seeing clever pricing strategies everywhere!