Absolute Cost Advantage

Absolute cost advantages can place competitors at a cost disadvantage, even if the scale of operations is similar for both firms. Such cost advantages can arise from an advanced position along the learning curve, where average costs decline as cumulative output rises over time. This differs from economies of scale, which involves the relationship between average costs and the output level per period of time. A firm that enters a market segment early can learn about the production and distribution process first and make more efficient use of assets, technology, raw inputs, and personnel than its competitors. In such cases, the firm can frequently reduce costs and prices and maintain market leadership. Similar advantages can result from possessing proprietary technology that is protected by patents. Some firms seek to maintain absolute cost advantages by entering foreign market. Early entry can allow the firm to gain experience over its competitors, as it can more efficiently track foreign market trends and technologies and disseminate new methods throughout the firm.