Complementary Demand

Posted in Marketing and Strategy Terms, Total Reads: 1649

Definition: Complementary Demand

The demand generated for a product as a result of demand for a related but different product, e.g., computers and software, vehicles and tyres, etc. This is also known as joint demand.

Thus, complementary goods are the exact opposite of substitute goods and they show negative cross-elasticity with respect to each other. When the price of one good falls, the demand of its complement increases. Thus, the demands of the two complements are linked to each other- the rise in demand of one leads to increase in demand of the other and vice-versa. Similar is the case with their prices. However, with substitute goods, the price and demand of one is inversely linked to the prices and demand of the other. Greater the price of one, lesser will be the price of the other.

The graph shows the effect on the demand of tea when the price of its complementary good (sugar) increases. Other examples of complementary products would be: printers and printer cartridges, DVD and DVD players, peanut butter and jelly.

A perfect complement is one that has to be consumed with another product. The indifference curves of such products will be at right angles to each other, e.g., left shoes and right shoes.

Complementary goods give the companies additional marketing power. As customers have nowhere else to go, it allows vendor lock-in because of the high switching costs. Some pricing strategies popular for complementary goods are:

i) Pricing the base good at relatively lower price to the complementary good, allowing easy entry for the consumers, e.g., printers and jet cartridges

ii) Pricing the base good at relatively higher price to the complementary good, allowing barriers to entry for the consumers, e.g., the entry fees to a theme park and the fees for individual rides inside the park.



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