Question

Give an example of each a commonly owned substitute and commonly owned complement (please note the spelling of complement, different from a compliment you give someone, a complement goes with something else, in geometry complementary angles sum together to equal ninety degrees). You must list the company owning (not a retailer selling two different products as the retailer only owns the inventory and not the brand) each product. For example, both Tide and Cheer laundry detergents are manufactured by Procter & Gamble and are substitutes for one another. You probably use one but not the other at any one time. Procter & Gamble also makes Downy Fabric Softener, a complement to one of the detergents. You use fabric softener in conjunction with the laundry detergent. Why are the products substitutes and complements? Do you believe the companies engage in optimal pricing (this may be an educated guess).  Note that Procter and Gamble might offer a coupon for $3 off when you buy both Tide and Downy. That would encourage buying the two products together.

Please do not use stores carrying products as an example. Any hardware store is going to carry numerous substitute products as well as complementary products.

Answer 1

Let us take two substitute products

Nestle Nan Pro 2 and Nestle Lactogen 2

These are follow up formula milk that can be used for infants above six months of age and both are Nestle products. Infants can be given either one of the goods at a time and hence these two are considered to be substitute goods. They both satisfy the same nutritional requirement for an infant.

Nestle also produces Nestle cerelac 6months plus.

As we know when an infant turns six months old, the diet goes beyond milk and typically is a combination of milk and solid foods with porridge like consistency as is the case of cerelac. Thus we can say formula milk (6months+) and cerelac (6months+) are complementary goods. This is so because these both need to given to complete a child's nutritional needs. Formula milk alone or cerelac alone would not suffice.

Due high level of substitutability of all the three products (cerelac can be substituted with home made porridge using cereals and formula milks also have substitutes in other brands like MeadJohnson's enfamil) the degree of price elasticity of demand is very high for all of them.

The profit maximizing output is where marginal cost (MC) Is equal to marginal revenue (MR) and beyond which level MC would begin to rise. This is theoretically optimal.

Is the pricing for these products optimal can be explained as below:

We know that the link between

The relationship between MR, Price (P) and price elasticity of demand ( ed) is given as

MR= P [1+(1÷ ed)]

Based on this equation we can understand there exists an inverse proportionality between ed and MR. That is higher the elasticity lesser will be the value of MR.

As output increases Both AR (AR=P) and MR fall but MR<AR at each level of output.

This falling trend of MR clubbed with high elasticity along with the MC=MR criteria explains that yes, this producer does follow optimal pricing. Also it has been a profit making producer over the years.