Which statement best defines competitive advantage?

• A. A firm has competitive advantage if it can sustain higher relative price and/or lower relative cost compared to rivals.
• B. Competitive advantage is achieved only through exclusive patents.
• C. It depends solely on marketing spend.
• D. It requires the firm to have the most employees.

Answer: (A)

The idea being tested is that competitive advantage comes from being able to outperform rivals on price and cost in a way that can be sustained. The best statement captures this by saying a firm has competitive advantage if it can sustain higher relative price and/or lower relative cost compared to rivals. In other words, the advantage comes from either charging customers more for the same or better value (pricing power) or producing at lower costs while maintaining similar value, and doing so consistently over time. That relative edge translates into higher profits or greater market share than competitors.

Patents can help, but they aren’t the only route and often aren’t durable beyond their protection period. Marketing spend alone doesn’t guarantee a lasting edge, because rivals can mirror campaigns or outspend you. Simply having more employees doesn’t automatically create an advantage unless it translates into lower costs or higher value delivered relative to competitors.