Competitive advantage goes to the firm that maximizes the difference between the cost of producing a good and the retail price that consumers pay.

Question

Quizplus · Accepted Answer

Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the maximum amount a customer is willing to pay (rather than the price they end up paying in the store), and C, the cost to produce the good or service. The reason is that a large difference between V and C gives the firm two distinct pricing options: (1) It can charge higher prices to reflect the higher value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share. Given this, the strategic objective is to maximize V - C, or the economic value created.

Competitive Advantage Goes to the Firm That Maximizes the Difference