There is a vast difference between comparative advantage theory of competition and neoclassical theory. The three streams that pose challenges in marketing theory and practice are strategic issues in market research, market orientation for firm performance and relationship marketing in strategic network competition . Marketing requires a new theory of competition, which outweighs the benefits of neoclassical theory. The new theory called the comparative advantage theory of competition evolves from the resource-based theory of the firm, competitive advantage from marketing, competitive rationality and differential advantage of marketing . On the other hand, the neoclassical theory assumes the principles of a perfect competition. The perfect competition theory always assumes a competitive market in academics. Hence, it is important that marketing academics avoid certain neoclassical terms. The major reason for the neoclassical theory to gain prominence and dominance in spite of its deficiencies is due to the lack of a well-articulated superior theory.
Theories play a major role in describing and forecasting the phenomena. A theory of competition is most essential to explain the macroeconomic phenomenon, which depends on planned economies with the cooperation of the state-based firms and central planning board’s direction of control . Competing firms are superior to cooperative firms in terms of innovation, standards of goods and services, and creation of wealth. The Eastern economies lack both the quantitative as well as qualitative features in terms of goods and services. The world’s market-based economies differ in terms of size, scope, financial performance and methods of operation. While some firms exceed the GDP of the country, others sell flowers at the corner of the street. While some firms are profitable, others are not. While some firms produce hundreds of products, others sell only a single product. While some are hierarchies, others are specializations. While some firms are consistently high on profits, others are not. Hence, the theory of competition should explain micro phenomenon of the diversity of the firms.
Neoclassical theory assumes homogenous demand of products. It expects the firm’s objective to be profit maximization, wealth maximization and maximization of present assets. It aims at a firm producing a single product with the consumption of resources, land and capital . While factors of production are homogenous, capital equipment is identical. The management plays the role of responding to environmental changes by deciding the quantity of production and implementing a production function. In the short run, firms regulate the quantity of production based on the environmental changes, such as change in price, costs of resources and costs of inputs . In the long run, firms regulate the scale of the plant. Long-run equilibrium in a perfect competition situation is a non-profit situation. Moreover, a firm allocates its resources to the most productive use and receives the value of marginal product. Hence, the environment of the firm determines the profits and performance of the firm.
Neoclassical theory explains the abundance of the products by focusing on the efficacy of perfect competition. Command economies misallocate resources due to lack of information of deployment of resources, profits and prices in market-based economies . Introducing an innovative feature in the long-run equilibrium leads to market imperfection. Moreover, perfect competition fails to explain the reason for high quality products in market-based economies rather command economies. In terms of firm diversity, perfect competition fails to explain the collusive behavior of the barriers of entry . Neoclassical theory explains the existence of large and small firms in minimizing the costs, including costs of opportunism. On the other hand, the comparative advantage theory of competition rejects the assumptions of the neoclassical theory and believes that the demand is dynamic and heterogeneous in nature with imperfectly mobile resources.
The comparative advantage theory of competition assumes that the individuals have imperfect information about the products both as consumers of products as well as managers of firms. Also, the theory aims at the firm’s primary objective of superior financial performance in terms of profits and return on investment. Rewards such as stock dividends, wages, salaries, capital appreciation, promotions, feelings of accomplishment and career opportunities play an important role in producing superior results . In such a case, markets are never in equilibrium. Also, resources are both tangible and intangible, which allow the firm to produce market offerings in market segments. The resources available to the firms are financial, which include cash reserves, physical, which include plant equipment, organizational, such as policies, control and culture, information, which includes competitor intelligence and relationship with customers and suppliers .
According to the comparative advantage theory of competition, the management plays the role of understanding current strategies, creating new strategies, implementing selected strategies and modifying the same according to market changes . Thus, superior financial performance is possible if the firm’s comparative advantage in resources yields competitive advantage in spite of the actions of the competitors. While the neoclassical theory assumes that the environment as well as the structure of the firm determines its conduct and performance, the comparative advantage theory of competition assumes that it is only the environmental factors that influence the conduct and performance of the firm . The comparative advantage theory of competition explains the reasons for the innovation, high quality goods and services in the market-based economies when compared to command economies. Thus, it assumes marketing orientation as a resource and considers all the internal and external factors in determining the competitive advantage of the firms .
References
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Hunt, S. D., & Morgan, R. M. (2011). The Comparative Advantage Theory of Competition. The Journal of Marketing , Vol. 59, No. 2, pp. 1-15.
Kohli, A. K., & Jaworski, B. J. (1990). MarketO rientation:The Construct, Research Propositions, and Managerial Implications. The Journal of Marketing , 54 (April), 1-18.
