Complementary Products Or Services Are Utilized in Combination with One

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complementary products1 which are associated with each other by the buyer. Stephanos Avgeropoulos, Tanya Brandenburger and Nalebuff (1996) show Sammut-Bonnici, and John McGee how complementors play an important role in analyzing the competitive environment and Complementary products or services are utilized make insightful comments on how Porter had in combination with one another. Typically, a lumped together the role of substitutes and complementary good has limited significance complements in his five forces and analysis. when used alone but, when used with its In their analysis of the video games console complementary products, its overall utility industry and Nintendo’s ability to generate page increases. Examples of complements are cars profits, they use a game theory approach to and tiers, tablets and applications, printers and model. ink cartridges. Complementary products have demand IMPLICATIONS FOR INVOLVEMENT IN THE patterns that are similar to each other such that INDUSTRY OF THE COMPLEMENTARY shifts in the demand of the first good will affect, PRODUCT positively, the demand for the other good. An There are a number of advantages that can increase in price for the first good would lower be gained by being active in and controlling its demand and pull down the demand for the complementary products, including economies second good. Complementary products are of scale in marketing (as demand for one good those that have a negative cross-price elasticity also boosts demand for the other), and other of demand thus mirroring the negative own shared activities such as logistics (see ECONOMIES price elasticity of demand. OF SCALE; ECONOMIES OF SCOPE). As with substitutes, there can be “strong” or Controlling complements, however, may have “weak” complements. This has implications for its own problems. The two most important pricing because as the price of good A is reduced, points are that the industry of the complement the demand for A increases and the demand for may not be as attractive as that of the base complement B also increases (hence positive good. The organization concerned may not have elasticity), whereas the demand for substitute C the skills, abilities, or any relevant competitive falls (hence negative elasticity). Kodak exploited advantage to compete effectively in that industry. this with its low price of cameras to increase Some complements may change over time, the sales of film. This is further helped if the so the firm’s involvement in the industry price elasticity of the complement (film) is low. of the complement may not have to be as For instance, it would not work the other way committed. Moreover, full scale operations in round, that is, by having a low price for film the complement’s industry are not always neces- hoping thereby to sell cameras. Other examples sary. Just being active in that industry may allow would include machinery and parts replacement the firm to influence it, so that other firms may costs (aircraft and jet engines or computers and feel obliged to follow its examples when it sets replacement parts). lower prices or provides a higher level of service. The strategic importance of complementarity As a result, controlling a relatively small share of is inferior to that of substitutability. Neverthe- less, complements raise the question of a firm’s the complement’s industry may well be sufficient scope of activities. A number of decisions have to improve sales and profitability of the industry to be made by a firm engaged in the production with which the main interest of a company lies. of complementary goods, namely, with respect IMPLICATIONS FOR PRICING to control over complementary products and industries, pricing, and the combined sale of The profitability of complementary goods complementary goods (bundling). The most may well require pricing to be pitched at levels important complements are those that have a different from those that would have been appro- significant impact on each other’s position (e.g., priate if the two products were not complements, in terms of cost or differentiation), and those or were not produced by the same firm.

IMPLICATIONS FOR CAPACITY PLANNING Brandenburger, A. and Nalebuff, B. (1995) The right game: use game theory to shape strategy. Harvard Finally, the relationship between complemen- Business Review, 73 (4), 63–64. tary goods may be exploited to forecast demand Brandenburger, A. and Nalebuff, B. (1996) Co-opetition, for one of them, given the change in the demand Doubleday, New York. for the other. Similarly, if the price of one good Lee, C.H., Venkatraman, N., Tanriverdi, H. and Iyer, rises or falls the demand for the other would B. (2010) Complementarity-based hypercompetition also be expected to be affected because they are in the software industry: Theory and empirical test, required together and the price of the bundle 1990–2002. Strategic Management Journal, 31 (13), is affected. These relationships can be used for 1431–1456. capacity planning purposes, particularly where Lo, H. and Chung, H.J. (2010) The impact of comple- the firm only controls one of the complements. mentary agglomeration and multi-unit systems on new product introduction. British Journal of Manage- ment, 21 (4), 905–920. ENDNOTES Porter, M.E. (1985) Competitive Advantage: Creating and 1 Original article by Stephanos Avgeropoulos. Sustaining Superior Performance, The Free Press, New Yo r k . Updated by Tanya Sammut-Bonnici and John McGee.

Bibliography

Aribarg, A. and Foutz, N.Z. (2009) Category-based screening in choice of complementary products. Journal of Marketing Research, 46 (4), 518–530.

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