Absolute cost advantage is the advantage enjoyed by a company because of having a lower cost structure. In strategic management, the term is usually associated with the incumbent’s superiority over newcomers.
Absolute cost advantage as a barrier to entry
Incumbent companies usually have a lower cost structure, which is difficult for newcomers to follow. Such benefits can be a barrier to preventing entrants from entry.
Because they have already been in the industry, incumbents can reach economies of scale. They also benefit significantly from the experience curve, better distribution network, more loyal consumers, and access to the best resources.
Incumbents also often have access to cheaper funds. Because they have been operating for a long time in the industry, they represent a lower risk than new entrants.
Therefore, it is difficult for newcomers to match the incumbent’s superiority. Also, incumbents will try to prevent new players from entering because their presence can increase competition and reduce potential profits.
When entering, incumbents can launch frontal attacks, even price wars. And, price wars often cause newcomers to fail, while incumbents, because they have an absolute cost advantage, survive.