Introduction to Absolute advantage & comparative advantage
Absolute advantage is the difference between what you can do and what you want to do. If you can do it faster, cheaper, or better than anybody else, then you have a comparative advantage.
Competitors will try to do it faster, cheaper, or better than you by trying to sell something different; by trying to make more money; by trying to attract customers who are not already customers of theirs; and by offering other products which are not currently available.
In short: absolute advantage means that the value of your product is greater than what anyone else is pushing on the market at that time or in any other market anywhere in the world. Compare this with the comparative advantage which means that the value of your product is greater than any other product on the market at that time or in any other market anywhere in the world.
Your product has a relative advantage over all your competitors if:
Competition does not exist (i.e., there is no possible interaction between two products)
You already have an established customer base for your current product (i.e., you already have customers for whom your current product matches their needs) or
You have a superior solution for similar problems (i.e., there is no possibility that your current solution can be improved on another competitor’s solution) or
The disadvantage(s) of competitors’ products are likely to be completely offset by advantages of yours (i.e., there is no possibility of competition with competitor’s solutions).
Definition of absolute advantage and comparative advantage
There is an old saying that goes something like this: “Uncompromisingly argue for what you will not change, and ruthlessly defend against what you will.” That is how businesses major and small operate. They don’t change their product or service offerings, no matter what the customer wants — so long as it is better than the competition (or worse). They try to defend their market share by whatever means are available, even if that means lying about the true nature of their offerings.
They want absolute advantage; they simply want to win. They don’t care about matching competitors or doing better than them; they just want to be better at beating them. They don’t care if a competitor is more efficient or whether they can do a more effective job in a different industry; they just have to beat them at their own game.
Compare these two scenarios:
Scenario A: Both companies sell pet food, but one uses additives to make it taste better while the other doesn’t (the additive company gets more profits)
Scenario B: Pet Food Company A makes additive-free pet food, but competitor B sells pet food with additives
The first scenario has an absolute advantage: Pet Food Company A wins because its products taste better; so its products sell more (and people buy more). The second scenario has a comparative advantage: Pet Food Company B wins because its products taste worse; so it sells less (and people buy less). The first scenario has no absolute advantage in the end (compared with Scenario A), but it does win in this comparison due to relative advantages.
Here’s another example from business news:
Product A: 100% cotton fabric, 20% polyester fiber Product B: 100% cotton fabric Product C: 100% acrylic fiber Product D: 100% polyester fiber Product E: 100% polyester fiber Product F: 50/50 polyester/acrylic fiber Product G: 50/50 polyester/acrylic fiber Everyone wants some fabric in their clothing! We know! We have all tried our hand at making our own clothing without any luck! We could try another company’s product – but would that really help? No thanks! It’s time we tried something new! [Our competitors] are using synthetic fabrics. We are using natural fibers, which are superior fabrics and allow us to have an advantage over our competitors. And we think you would like that too!
Illustration of absolute advantage and comparative advantage
There is a difference between absolute advantage and comparative advantage.
Absolute advantage is about having the most number of customers for a product or service. Comparative advantage is about having the most customers for a product or service against others. It’s like saying that you can have more than your fair share in a card game (generally the players who have more cards win).
The reason why it’s important to distinguish between absolute and comparative advantage is that it can be used to make different assumptions than they are usually used in business. For example, if we assume that if there are 100 customers for our product, we will be able to sell 100 of them, then it would be wrong to say that we are an absolute advantage. This could mean that our sales may fall short by only 100 customers and we don’t make any money, or our sales may go up by 100 but we lose money. In fact, if our sales exceed our customer count, or they exceed those of other businesses which do not do what we do, then it should not matter whether we have an absolute advantage or not.
In order to further clarify these points:
1) If I am selling an escalator for my store and there are 200 escalators in existence, I will not necessarily be at an absolute disadvantage even if I only have 200 customers (not saying that’s the case). If all of them were sold at once and simultaneously then I would still be at an absolute disadvantage; however, what matters here is the number of escalators sold per customer (this helps illustrate the point that where you start matters more than where you end up).
2) Also note that if there are 100 escalators available but only 20 people want one then I will also be at an absolute disadvantage even though I may sell 100 people per day. This comes down to how many other businesses want one too (and this needs to be done with some caution as some businesses which claim they don’t need a salesperson may actually need one).
3) In general speaking, the real truth lies somewhere between these two extremes: so while it is true that some products can always perform better than others across all situations (absolute advantages), some products cannot perform as well as others under all situations (comparative advantages). So what does this mean? It means that there are conditions under which both types of advantages apply and when you combine them, you’ll inevitably get something close to perfect performance (absolutely advantageous). And con
Comparison of absolute advantage and comparative advantage
Relative advantage is the ability to produce a good or service at a lower cost than your competitor. Absolute advantage is the ability to produce a good or service at a higher cost than your competitor.
Let’s consider an example:
Imagine there are two companies, A and B, both of which sell the same product in different markets. They each have one thing in common: they can supply their product for the same price, but their relative advantage is that they can produce it faster. They have no inherent competitive advantages over each other, so they can easily set out to work on what sets them apart:
A is able to produce it at $50/unit and ship it by nightfall (i.e., within 24 hours) while B has to spend $110/unit just to get it out of the factory before nightfall (i.e., within 6 hours). A is not able to make more money from this as it requires extra time and energy just to set up production facilities; B does not have any extra capital available for this either (it needs additional capital for its own facilities).
The two companies do not compete on absolute advantage — i.e., either one can sell for $50/unit and ship by nightfall and win on this end of the market — rather, their relative advantage is that they are each able to save some time and energy in order to get their products out there faster than their competitors. This means that X=Y, or, when looked at in terms of market share, that A=B (assuming 0% customer overlap).
It should be noted that absolute advantage describes different aspects of relative advantage: you could also say that A has an absolute advantage if its customer base buys products from A at a higher rate than purchases from B (i.e., when compared with its own customers); alternatively, you could say that Y has an absolute disadvantage if it sells products at a lower rate than others do; these are however not mutually exclusive concepts so we will simply make use of the word “absolute” here as shorthand for both comparative and absolute advantages.
In practice, there will be some variation between different contexts where comparative disadvantage may be more appropriate but here we are focusing on absolute versus comparative disadvantage because we know ourselves better than anyone else yet still recognize situations that may call for both types of reference points (like high-impact campaigns). The distinction between comparative and absolute advantages is somewhat artificial because there are many situations where confidence in your
I think it is always a good idea to iterate on your metrics, but it is important to make sure that you are not misrepresenting the metrics themselves. I’ve seen companies try and use different metrics in the same analysis, often with no rhyme or reason:
So, what is the difference between comparative advantage and absolute advantage?
The two terms are similar because both mean ‘advantage’ for a particular product/service. But in order to get an absolute advantage, you must be able to offer more than your competitors. You must be able to offer a product that people want more than other products. You need to have additional features, extra functionality or special capabilities that separate you from your competitors. In order to get there, you will have to improve on what they offer (competitors). So if we look at our metrics as something that we can improve upon through testing, then these two terms become very similar:
If we look at our metrics of relative performance then these two terms become very different:
If we look at our costs (cost per customer) then these two terms become very different:
To summarize this post: comparative advantage means offering something better than the competition (in some sense), while absolute advantage means offering something better than your competitors (in some sense).
When comparing metrics, always make sure you understand how you rank against your competition. For example, if one company offers 2c/month for their text editor vs another company offers 10c/month for theirs, then that is a comparative advantage for the former but not the latter.