Examples for Complements

Week 3

Complements Examples and Definitions

Examples for Complements Computers & Software

Skis & Skiing Sticks

Smartphones & Apps

User Utility (I/II) Two products A and B These are complements if B increases users’ utility from A, and vice versa U(A+B) > U(A) + U(B)

User Utility (II/II)

U(laptop)=

U(software)=

U(laptop + software)=

Cross-Price Elasticity (I/II) Two products A and B These are complements if the demand for B increases when the price of A drops, and vice versa This phenomenon is referred to as negative cross-price elasticity

Cross-Price Elasticity (II/II)

Price (laptop)

Demand (software)

Surprising Complements Substitute goods can also have complementary effects A price cut of the substitute good decreases market share but increases the size of the market, resulting in a positive net effect Example: Cloth shops in the same mall •

Shop A’s price cut makes the whole mall more attractive

•

Shop B’s sales increase due to the additional customers

Competitive Strategy Tobias Kretschmer Professor of Management, LMU Munich

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