Thursday, September 1, 2011
Compliments and Substitutes
A consumer’s buying decisions are often affected by whether the product they are buying is a compliment or substitute to an existing good. A compliment good is a good which pairs well with an existing good, while a substitute good is a good which generally serves a similar function, and is therefore replaceable with, an existing good. Compliment goods are generally bought together, while substitute goods are often in competition against each other. Example of compliment goods include: milk and cookies, DVD players and DVDs, cellphones and cellphone cases, or cars and gasoline. Examples of substitute goods include: Coca-cola and Pepsi, chinese food and pizza, or Post cereal and Kellogg’s cereal. How is a consumer’s budget factored into this? If the price of a good increases, you are less likely to buy the compliment and more likely to buy the substitute. Conversely, if the price of a good decreases, a consumer is more likely to buy the compliment and less likely the buy a substitute. For example, if the price of DVD player becomes really low overnight, you will not only buy the DVD player, but also be willing to buy more DVDS because you have allotted a certain amount of your budget to home entertainment. Similarly, with substitutes, if the price of Coca-cola doubles, you are likely to be willing to drink Pepsi instead, even if you don’t prefer it as much.