When two products are supplements, an increase in one’s sold volume will increase the amount that the other sold. This could be caused by an increase in the demand of product A or a price reduction (making increased demand volume). Products can be so closely related that they are purchased in fixed ratio. An example is kitchen knife, each of which should be made of a wooden handle and a metal blade.
Other supplement products are a personal computer and a keyboard, and another example is an automobile body and a set of four wheels. Somewhat less certain but still closely related products are razor and razor blades, tennis rackets and tennis balls, and computers and software. There are even more remotely related products where one’s demand can easily have a beneficial effect on another’s demand. For example, a popular textbook of economics published by a special company can increase the sale of finance textbook by the same publisher.
Importantly, the demand for a product is affected not only by its price, income and taste, for example, but also by the prices of related items very strongly. Here we focus on the impact of supplemental objects on a firm’s revenue. Thus, if products A and B supplements, the change from A to revenue will bring about a change from B to revenue. In both cases, the profit maximumization will be at the familiar point where the marginal revenue of each product equals its marginal cost. Because each demand equation will include prices of both products, simultaneously solutions for the pricing problem would require solutions for equations.
If managers had good, clean demand and cost functions available for each product, they could reach the combined profit maximization situation using relatively simple mathematical sources. However, because the decision maker in real life won’t have enough data, the mostathefication process will proceed with a test-and-error course, where markups for products (and thus prices) will be adjusted to optimal combination. has reached. In fact, this process will be even more complex in reality because it is not only a supplementary relationship between the firm’s two products that have significant impact on the firm’s revenue (and benefits); products of competitors that are our firm’s products should also be considered in the pricing process.
Another example in which a company should consider these interrelationships. It is not necessary that a firm produce two related products together. It can just produce one and it can be in the decision-making process whether the supplement product is started producing. In calculating the profitability of such expansion, the company should include an increase in the sale of the product first and the profit earned on it. If it left this positive effect, it would be to figure out by reducing the benefits of the new product. This can make decisions against the introduction of the product while actually bringing the new product into the market will increase the total profit of the company. For example, suppose a successful manufacturer of television sets is considering whether a new series of DVD players be launched. In calculation of the potential profitability of creating a DVD player, the manufacturer should include the possibility of increasing sales (and profits) from its television line.