3
$\begingroup$

I'm looking for economic terminology which must exist, although I don't know what it is. (I want to look up articles on a particular situation involving two real-world companies.)

Here is the situation: Company A is developing a diagnostic test which will warn of a particular type of deadly antibiotic resistance. Company B is a pharmaceutical company developing a drug to treat that kind of resistance.

Is there an economic terms that describe concepts relevant to this situation? The important features are that

1) Product B will never be bought without product A. 2) Customers will only buy A with the intention of possibly buying B. 3) Product B will certainly sell at a very high price if product A works perfectly, because A will identify those patients for which B is life-saving. A deserves some of this return, but the many customers buying A each will have only a low-probability of being one of the few to benefit.

Similarly, one could imagine a related case that there are exactly two bicycle wheel manufacturers, and by law A can only sell front wheels and B can only sell back wheels. There will be some sort of odd price hostility between A and B, because the two products are each useless without the other. The natural thing to happen is for the producers A and B to merge, although wrangling about the terms of a merger may make this impossible.

In my real-world case the cognizant shareholders of A should oppose any buyout by B at anywhere near current market prices, because A's technology will extend to many many other applications.

Improve this question
$\endgroup$
2
  • $\begingroup$ How are these two companies in price competition? They are not competing with each other at all. $\endgroup$
    – Giskard
    Commented Jul 22, 2017 at 5:59
  • $\begingroup$ Hmm. There is more technology I don't know. Neither product is of any use without the other. Its as if an apartment had two different landlords, where either could evict you for not paying rent. There would be some natural hostility (described by a term I don't know) between the landlords, because an increase in the price paid to one landlord must ultimately reduce the price the customer is willing to pay to the other landlord by a similar amount. $\endgroup$
    – Drug investor
    Commented Jul 22, 2017 at 8:04

1 Answer 1

Reset to default
3
$\begingroup$

Product A and B are perfect complements. As the Wikipedia entry states:

A perfect complement is a good that has to be consumed with another good. [...] One example is a left shoe and a right; shoes are naturally sold in pairs, and the ratio between sales of left and right shoes will never shift noticeably from 1:1, even if, for example, someone is missing a leg and buys just one shoe.

The example of the shoe matches the one of the bicycle you give.

Additionally, the two goods do not need to have a symmetric degree of complementarity. Again, quoting Wikipedia:

In the case of video games, a specific video game (the complement good) has to be consumed with a video game console (the base good). It does not work the other way: a video game console does not have to be consumed with that game.

So, for example the base good can be the diagnostic and the complement is the drug.

Improve this answer
$\endgroup$
4
  • $\begingroup$ This is an interesting situation. Suppose that the diagnostics company tells the drug company that it will not sell any tests to hospitals unless the drug company pays a 30% commission on any drug sales. (I'm not sure if that is legal, and healthcare law might further obscure the answer.) It's an odd case where the usual assumption that sales of goods are to the customers breaks down. $\endgroup$
    – Drug investor
    Commented Jul 22, 2017 at 9:35
  • $\begingroup$ From Wikipedia, it looks an even better term in the drug-diagnostic case is "complementary monopoly". $\endgroup$
    – Drug investor
    Commented Jul 22, 2017 at 10:19
  • $\begingroup$ @Druginvestor I think there is a great likelihood of takeover in such case. You could also expect a rush of competitors in both sides of the deal to increase effort in developing alternative tests and drugs. $\endgroup$
    – luchonacho
    Commented Jul 22, 2017 at 10:20
  • $\begingroup$ @Druginvestor That would be the case if the test and the drug are protected by patents (which you expect), and there are no close substitutes to each of them. That is not the case of videogames or shoes. $\endgroup$
    – luchonacho
    Commented Jul 22, 2017 at 10:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.