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Complementary products are goods that have a related use for another good, such as hot dogs and buns. Companies must balance supply and demand to maximize sales, and failure to do so can result in lost sales and obsolete inventory. During economic downturns, complementary products may sell better as consumers look for cheaper alternatives.
A complementary product – more commonly referred to as a complementary good in economics – is an item that often has a related use for another good. Economists typically use classic examples to define a complementary product, such as hot dogs and hot dog buns, automotive vehicles and rubber tires, or hamburgers and hamburger buns. Demand for one of these goods often drives demand for the other due to their interrelated use. The purpose of defining goods as complementary can help economists understand the decisions made by homo economicus, the economic man. Companies may also use this information for general business purposes.
Supply and demand are the common way economists determine how an economy allocates resources. Price is the single most important factor here as sellers and buyers attempt to reach a point where they can maximize the movement of goods. Companies selling a complementary product must ensure that there is sufficient supply for each good. The price of each good tends to have separate equilibrium points as defined by supply and demand. Companies must ensure that the balance for each good is close to each other in order to maximize the sales of each item.
When a price increase of a complementary product rises to a high level, consumers tend to look for a substitute product. This means that consumers find an alternative good that offers similar value to the preferred good. The other item that sells well with the complementary product will also start to falter in sales. Therefore, companies need to find a way to offload complementary goods that will go unsold due to rising prices of the other product. Failure to do so will result in lost sales and obsolete inventory in the future.
Companies may not be able to sell all complementary products on their own. For example, a hot dog manufacturer often focuses solely on selling hot dogs since that is the goal and purpose of the business. The sale of hot dog buns, therefore, falls to another company, most likely a bakery. When the price of hot dogs increases exponentially – throwing off the balance of supply and demand from the kilter – then the sale of hot dog buns will most likely decline. In this case, two companies will suffer uncertain sales and will have to find ways to survive an economic downturn.
In some cases, a complementary product may sell better during economic downturns. For example, a decrease in purchasing power can prevent consumers from buying filet mignon. Hot dogs then become the substitutes due to the lower prices of these items compared to filet mignon. As sales of hot dogs increase, so will sales of complementary products, such as hot dog buns.
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