Ever wonder why the price of a
computer printer is so cheap and the price of ink cartridges
for that printer are so expensive? Stores sell printers at
low prices because there is a high and negative CROSS
ELASTICITY OF DEMAND between printers and ink. A company
may offer a printer at a low price, because it knows this
will lead to increased sales for the highly profitable ink
cartridges. Printers and ink are complementary
products.
The business term for this is "loss
leader". A business will sell one item at a loss to "lead"
people into their store who will buy lots of other related
(complementary) items.
Before Thanksgiving in November the
demand for turkeys goes up so we would expect the price of
turkeys to go up, but if you have ever shopped for your
Thanksgiving turkey you found that they are usually on sale
at low prices! Why?
The turkey is a loss leader. Selling
turkeys at a low price will bring more customers into the
store who will buy lots of other complementary items. This
is because there is a high and negative CROSS ELASTICITY
OF DEMAND between turkeys and all the other food we put
on the Thanksgiving table.
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