A complementary good, in contrast to a substitute good

Substitute good

In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...

, is a good with a negative cross elasticity of demand

Cross elasticity of demand

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in...

. This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased. If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each good will be demanded.
A decrease in price of A will result in a rightward movement along the demand curve of A and cause the demand curve B to shift outward; more of each good will be demanded.

Examples

An example of this would be the demand for hotdogs and hotdog buns. The supply and demand of hotdogs is represented by the figure at the right with the initial demand D1. Suppose that the initial price of hotdogs is represented by P1 with a quantity demanded of Q1. If the price of hotdog buns were to decrease by some amount, this would result in a higher quantity of hotdogs demanded. This higher quantity demanded would cause the demand curve to shift outward to a new position D2. Assuming a constant supply S of hotdogs, the new quantity demanded will be at D2 with a new price P2.

Other examples include:

• Peanut butter and jelly
• Printers and ink cartridges
• DVD players and DVDs
• Computer hardware and computer software

Perfect complement

A perfect complement is a good that has to be consumed with another good. The indifference curve

Indifference curve

In microeconomic theory, an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. One can equivalently refer to each point on the indifference curve...

 of a perfect complement will exhibit a right angle, as illustrated by the figure at the right. Few goods in the real world will behave as perfect complements. 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 - even if, for example, someone is missing a leg and buys just one shoe.

The degree of complementarity, however, does not have to be mutual; it can be measured by cross price elasticity of demand

Cross elasticity of demand

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in...

. 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.

Example

A classic example of mutually perfect complements is the case of pencils and erasers. Imagine an accountant

Accountant

An accountant is a practitioner of accountancy or accounting , which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities and others make decisions about allocating resources.The Big Four auditors are the largest...

 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

Utility

In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....

 would be given by an increasing function of:

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

In marketing

Marketing

Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...

, complementary goods give additional market power

Market power

In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...

 to the company. It allows vendor lock-in

Vendor lock-in

In economics, vendor lock-in, also known as proprietary lock-in or customer lock-in, makes a customer dependent on a vendor for products and services, unable to use another vendor without substantial switching costs...

 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)