What is a 'Complement'
A complement refers to a complementary good or service that is used in conjunction with another good or service. Usually, the complementary good has little to no value when consumed alone, but when combined with another good or service, it adds to the overall value of the offering. A product can be considered a complement when it shares a beneficial relationship with another product offering.
BREAKING DOWN 'Complement'Complementary goods have connected demand that's referred to as elasticity of demand. This means that if the price of a good increases, the price of the complement decreases, seeing as price and demand are highly elastic. This is because when the price of a good rises, demand for its complement falls due to the fact that consumers don't want to use the complement alone.
This is in contrast to substitute goods, which are different products or services that satisfy the same consumer needs. They can, therefore, replace each other rather than complement each other. For this reason, if the price of a good goes up, the demand for a substitute good also goes up, and vice versa.
General Examples of Complementary Goods
For example, if the price of hot dogs rises, it causes a decrease in the demand for hot dog buns. Since the price of hot dogs has an inverse relationship to the demand for hot dog buns, they are considered complementary products. Additionally, complementary pairs are not two-sided and often have one-sided effects. Using another example, if the price of car tires decreases, it doesn't necessarily increase the demand for cars. However, if the price of cars decreases, it does increase the demand for car tires.
Real World Example of the Rise of a Complementary Good
Often times it is more beneficial to be a complementary good versus a substitute good. As of July 22, 2016, Netflix, Inc. is considered a substitute good for traditional cable. However, with the potential unbundling of cable channels in the future, financial analysts believe that Netflix may move from a substitute good to a complementary good.
The unbundling of channels refers to the ability for consumers to pick and choose which cable channels they pay for, rather than being required to purchase an entire cable package. The belief that Netflix may become a complementary good to cable once it decides to unbundle has caused analysts to estimate that the company's international subscribers could grow to reach 98.8 million by 2020 and 165 million by 2025. Unbundling reduces the overall cost of cable, and more users are expected to subscribe to Netflix in addition to their chosen cable channels.