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What Is the Difference Between Comparative and Competitive Advantage?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 21 October 2014
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Comparative and competitive advantage are different terms that mainly refer to what informs the decision behind the choice of what to produce in a competitive market. Comparative advantage occurs when a company or country can produce something at a relatively cheaper rate than can the competition or other countries. Competitive advantage occurs when a company emerges as a leader in its market sector due to the ability to produce goods or deliver services at higher profits than the competition and at a lower cost to the consumers.

In analysis of comparative and competitive advantage, the entities involved must conduct an assessment of their strengths and weaknesses with a view of finding out their areas of advantage. In the comparative advantage, one entity could have an advantage in the production of a product due to the fact that the raw material used for production is readily and cheaply available. An example is two countries that produce motor oil lubricants. Country A may be located in an oil-producing country in the Middle East, while Country B is located in Asia.

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Using the example above, country A has a comparative advantage because it produces the raw materials for making the motor oil lubricants. Country B has to import the raw materials from Country A or other oil-producing countries at a considerable cost. This means that Country B is comparatively disadvantaged when it comes to the production of motor oil lubricants in comparison to Country A. To this end, Country B might want to look for something else in which it has a comparative advantage.

Also, while assessing the factors in comparative and competitive advantage, the entities involved should decide if it is better to produce or easier and cheaper to import the item in question. This is especially true for a situation in which a company has comparative advantage in the production of a product. On the other hand, competitive advantage focuses on advantages in profit and advantages in the price.

In competitive advantage, a company has advantage over other companies in a competitive market when it is able to offer similar or related products to customers at a lower price than the competitors. The second factor in a competitive advantage is if the company is also able to post more profits than the competitors even while selling the goods at a reduced price. For instance, if 15 companies in a geographical region produce sneakers, the one that is able to sell its sneakers to consumers at a cheaper rate than the others and still make more profit has the competitive advantage. As such, the main difference in comparative and competitive advantage lies in the fact that competitive advantages are decided by higher profits and lower costs to consumers, while comparative advantages are decided by ease of production.

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turquoise
Post 3

I'm not an expert or anything, but the difference between these two seem to be the sales margin. Comparative advantage doesn't seem to care too much about how much a product is sold and how much money is made. It's more about efficiency. But competitive advantage is about making things at a low cost and then being able to sell them and make a good profit.

bear78
Post 2

@fBoyle-- Competitive and comparative advantage are two ways of looking at manufacturing and trade.

Competitive advantage simply favors whoever manufactures a good at a lower price, sells more and makes the most profit. In a market where competitive advantage matters, the business that can accomplish this will dominate that industry and stifle all its competitors.

Comparative advantage is a more flexible system where everyone can produce something and trade with one another. It's a system where everyone is a winner because each business is encouraged to concentrate on the good that they have a better efficiency in. So a business (or a country) doesn't have to be the best at something, it can still participate in trade and benefit.

fBoyle
Post 1

I don't think I understand the difference between comparative and competitive advantage. They sound the same to me. Can anyone help? Can you give me an example?

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