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Definition: Complementary Product
A complementary product is a product whose use is directly related to the use of another base or associated product such that a surge in demand for one product results in an increase in demand for the other.
In terms of economics, if the price of one good is reduced, it results in the increase of demand for both products. Similarly if the price of one good rises and consequently reduces its demand, it might reduce the demand for the complementary product as well.
Often the complementary product can be assumed to have little or no value when consumed alone. But when it’s paired with another product or service, as a combination they offer much greater value to consumers.
Let us consider the example of cars and car tires. For simplicity, let’s also assume that all cars use similar tires. In the absence of cars, car tires have no value and vice-versa. To understand the financial implications, let’s use the demand supply curve. Suppose the initial price of car tires is P and the quantity demanded is Q- corresponding to a demand curve D for cars. If for certain reasons the price of car tires comes down to P*, the quantity demanded goes up to Q*. If we go by the demand-supply curve and assume the supply of cars to be constant, we can easily claim that the demand curve would shift and the demand for cars would also go up from D to D*.
When tubeless tires had not become commercially viable, even tubes and tires could be considered complementary products although tubes are replaced more often than tires.