11 Types of Economic Advantage
John Spacey, November 17, 2015 updated on March 20, 2021
An economic advantage is a position or capability that allows you to outperform in a particular market. It's a similar concept to competitive advantage but at the level of economic fundamentals. The following are a few types of economic advantage.
1. Economies Of ScaleThe tendency for cost per unit to drop as you produce more of a product or service. Economies of scale is often due to dilution of fixed costs such as factories and shared costs such as marketing.
2. Economies Of ScopeEfficiencies related to offering a wide variety of products and services. Costs such as operational expenses can be shared across multiple products. It is also possible for multiple products to leverage assets such as a brand. In some cases, economies of scope is related to customer preferences for a variety of choices such as the thousands of items offered by a large supermarket.
3. Information AsymmetryA situation where you have better or faster information than others in the same market or industry.
4. Absolute AdvantageThe ability to produce more than your competitors with each unit of resources such as labor, capital and land. For example, the ability to grow more grapes per acre of farm. Generally translates into a cost advantage.
5. Bargaining PowerBargaining power is the ability to influence in negotiations. It is often related to how much you have to lose if an agreement isn't reached. In other words, you tend to have a better position when you have little to lose.
6. Barriers To EntryBarriers to entry is how difficult it is for new competitors to enter your market.
7. Critical MassThe volumes needed to be efficient or for a product to catch on.
8. Market PowerMarket power is the ability to affect the market price for a product or service. Usually restricted to large competitors that dominate a market. In some cases, the price of a major competitor acts as a price umbrella that impacts everyone in a industry.
9. Network EffectThe network effect is the tendency for the value of a product, service or technology to be proportional to the number of people who use it.
10. Switching BarriersSwitching barriers are the obstacles that your customers face to switch from your products or services to a competitor.
11. Economies Of DensityLocating in a dense urban environment such as in a city or within close reach of multiple cities allows more efficient access to labor, resources and customers.
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