A complementary product — more commonly referred to as a complementary good in economics — is an item that often has an interrelated use with 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. The demand for one of these goods often drives the 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 can also use this information for general business purposes.
Supply and demand is the common way economists determine how an economy allocates resources. Price is the single greatest factor here as sellers and buyers attempt to reach a point at which they can maximize the movement of goods. Companies selling a complementary product have to ensure enough supply exists for each good. The price for each good tends to have separate equilibrium points as defined by supply and demand. Companies need to ensure the equilibrium for each good is close to each other in order to maximize the sales of each item.
When a price increase of one complementary product rises to high, consumers tend to look for a substitute good. This means consumers find an alternate good that offers similar value as the preferred good. The other item that sells well with the complementary product will also begin to falter in sales. Therefore, companies must find a way to unload complementary goods that will go unsold due to the price increase of the other product. Failure to do so will result in lost sales and obsolete inventory at some point in the future.
Companies may not be able to sell all complementary products on their own volition. For example, a hot dog manufacturer often focuses solely on selling hot dogs as this is the goal and purpose of the business. Selling hot dog buns, therefore, falls to another company, most likely a bakery. When the price of hot dogs increases exponentially — throwing the supply and demand equilibrium out of kilter — then the sale of hot dog buns will most likely fall. In this case, two companies will suffer faltering sales and must 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 result in consumers being unable to purchase filet mignon. Hot dogs then become the substitute good due to the lower prices of these items compared to filet mignon. As hot dog sales increase, so will the sales of complementary products, such as hot dog buns.