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1. How can the neoclassical theory of perfect competition inform theories of competitive advantage?A stark competitive environment characterizes the neoclassical theory of perfect competition. In this
competitive environment there are no entry barriers, every firm can therefore enter and exit at their
will (mobility). The industry contains many firms producing identical products (homogeneity:
Standardized products). Because of this firms have to charge the same price to sell it goods. Prices
above would make no sense, because this would lead to the situation where the firm would not sell its
products. Furthermore competition is at its greatest level, and economists argue that perfect
competition brings maximum welfare because it produces best possible outcome for consumer and
society. Supernormal profits are only possible in the short-run. The market imperfections are short
lived, because this attracts other to enter the market, which by assumption have complete information
about the industry. Therefore we can say that firms earn zero economic profits in the long run.
These implications of the neoclassic economics lead to a conclusion that there is no room for
competitive advantage, because there is no sources of advantages firms can enjoy. A competitive
advantage could arise when other entrants and imitations do not threaten firms in the industry. This is
also mentioned by Michael Porter, who claims that a competitive advantage also requires a
differentiation advantage (or low-cost leadership), but that conflict with the main idea of perfect
competition where all firms are identical. To have a positive added value, the output must be different
from competitors. Moreover Brandenburger and Stuart also mention that firms must enjoy
asymmetries, to gain profits. Ghemawat and Rivkin understand competitive advantge when a firm
earns superior financial returns in the long run, but this is not realizable in an industry where no entry
barriers are. In conclusion it is show that in a perfect competitive market there is no room for
competitive advantage.
However the model of perfect competition provides the main theoretical benchmark for theories of
competitive advantage (Besanko et. Al. 2000). Any deviation from the assumption mention above
(homogeneity, mobility, rationality) can be a source of competitive advantage. An example is the
Ricardian view. When there is information asymmetry about resources. One firm may be able to buy
the resources below economic cost. Some resources are more profitable then others, which will result
in lower prices for the buyer or more profit for the firm. An other example can be found in the
positioning school. If a firm is able to differentiate their product it could get a competitive advantage
over other firms within the same industry.
A last example is from the resource-based view in the case that resources are not mobile because of
contracts, legislation or other (natural) barriers, this can give the firm with access to the resources a
competitive advantage over firms who do not have access.
To summarize, within the neoclassical model all the sources of competitive advantage are dismissed
by the assumptions. This makes the model an ideal benchmark for other theories. Each theory
discussed above abolished one of the assumptions and by doing so revealed a source of competitive
advantage.
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