Competitive Advantage Flashcards
Competitive advantage
Firms earn higher economic profit than the average rate of economic profit of other competing firms in the market
What does competitive advantage depend on?
It depends on the market economies and the value-created relative to competitors ( benefit position and cost position)
Maximum willingness to pay
the price at which the consumer is indifferent between buying and not buying
Consumer surplus
the difference between the max the consumer is willing to pay and the market price; it has to be positive
How to increase CS?
increase benefit or lower price
Value created
B-C=(B-P)+(P-C)
Cost Leadership
- creates a larger B-C than its rivals by lowering C
- price product below rivals and sell more
- match rivals’ price and achieve better price margins
How does a cost leader create more value?
- benefit parity (same benefits)
- benefit proximity
- offering a qualitatively different product
When should we look for cost advantage?
- the product can’t be enhanced
- consumers are price sensitive
- the product is a search good
Benefit leadership
creating a larger B-C by achieving a higher benefit than rivals
How to achieve benefit leadership?
-cost parity
-cost proximity
- substantially higher benefit and higher cost
When should we look for benefit advantage?
- willing to pay a premium for enhancement
- differentiation is the best route for value creation
- the product is an experience good
High price elasticity + Cost Advantage
- modest price cuts gain market share
- share strategy: underprice competitors to gain shares
High PE+ BA
-modest price hikes lose shares
- share strategy: maintain price parity with competitors
Low PE+ CA
-big price cuts gain little share
- margin strategy: maintain price parity with competitors
