Strategic complements and substitutes
Choices are complements when one side doing more makes the other want to do more as well, and substitutes when it makes them want to do less.
Often misread asReading complements and substitutes as facts about the goods, so products that substitute for each other in demand are assumed to be strategic substitutes.
How to see it
Does their doing more make you want to do more, or less?
Actions are strategic complements when one player doing more raises the other's incentive to do more, and strategic substitutes when it lowers it. Price competition usually gives complements: if a rival puts prices up, you want to put yours up too. Quantity competition usually gives substitutes: if a rival produces more, you want to produce less. The whole distinction is the sign of the slope of the best response.
The checkThe classification is about the slope of best responses in the chosen variable, not about demand. The same two goods are strategic complements when firms set prices and strategic substitutes when they set quantities.
Try itTake two firms selling near-identical products. Work out your best response when the rival cuts its quantity, then when the rival cuts its price. The sign flips, with nothing about the goods having changed.
Games that show it
Know these first
Easily confused with
Sources
- Bulow, J., Geanakoplos, J. & Klemperer, P. (1985). Journal of Political Economy 93(3), 488-511.
- Tirole, J. (1988). MIT Press.