Complementary Goods

In this article, I would like to discuss complementary goods and provide some real world examples of how companies use them to make a profit. I'd like to start off by briefly describing what complementary goods are. Complementary goods are basically goods that are intended to be bought together (though not necessarily at the same time). For example, pencils and erasers, or hotdogs and buns, can be considered complementary goods. As expected then, a decrease in price of one of the goods would increase the demand for the other (since the demand for the first good would increase as well and since, as mentioned before, the two goods are purchased together). The vice versa is also true.

This is all well and good, but how can firms use this to make a profit? The more helpful question would probably be: How have firms already done this? The key rests in the necessity of the firm to produce BOTH complementary goods. From there, a simple marketing scheme can easily raise profit.

Let's take Apple as an example. Since Apple produces both the OS X operating system, as well as the Macintosh computers which are, as far as the layman is concerned, the only ones that can run this operating system, these two products are quite natural complementary goods. So how can Apple exploit this fact to make some money? Suppose that Apple announces that the OS X operating system is, for a limited time, going to be $10 cheaper. Certainly some people will go out and buy the operating system without buying a new Mac as well, but they are assumed to be the minority of shoppers. This marketing plan bases itself on the feasible idea that enough additional people will buy the now cheaper operating system, and the new computers to go with that operating system, to not only nullify the loss of profit from the $10 off sale, but to substantially overcompensate for it. Many variations of this basic strategy can be employed to attack specific markets at specific periods of time.

As mentioned before, the essential ingredient to maximizing the effectiveness of this policy is for the company to have sole, or almost sole, rights to produce both complementary goods. Microsoft, for example, would not have similar success lowering the price of their Windows operating system. Why? Because Microsoft does not produce computers, and even it did, there are too many other manufacturers producing PCs capable of running the Windows operating system. This weakens the tether between the complementary goods and hurts the profitability of the strategy.