Economically speaking, absolute advantage refers to the capacity of any economic agent, either an individual or a group, to produce a larger quantity of a product than its competitors. Introduced by Scottish economist, Adam Smith, in his 1776 work, “An Inquiry into the Nature and Causes of the Wealth of Nations,” where he described absolute advantage as a certain country’s intrinsic capability to produce more of a commodity than its global competitors. In the following years prominent economists reviewing companies and production policies presented the following results:
Viewing the markets in two distinct types, Monopoly or Cartel vs Duopoly:
• Compared to a monopoly, in a duopoly the price is lower and the production level is higher, reflecting the availability of the products to a greater number of people.
• Since the production is higher, in principle a greater number of people are employed to build the product.
• The aggregate profit for the companies is lower in a duopoly than in a monopoly.
As expected our model shows that competiton benefits the customers but diminishes the profits of the companies. Observing a situation of duopoly where two firms compete for the market, an analysis of their strategy gives the result. Collusion is likely the best and profitable outcome for both. At first, the two did not cooperate, after building some best-case scenarios about competitive output, the two may realize that collusion is the best solution in developing a pricing strategy to satisfy the needs of both companies. However, such behavior is known as collusion and is illegal in most countries. When collusive agreements are made openly and formally, companies form a cartel.
Collusion generates high prices in the market and hurts consumers. Because it violates the principles of fair competition. Perhaps, the solution should define how resources are distributed in society. Including several levels of equilibrium in promoting a competitive market concept because it allows the most efficient allocation of resources where economic strategies can be selfish but offer the idea of a decentralized economy and believe that the market will move toward equilibrium itself when there is disequilibrium. In a disequilibrium condition, the market will return to its new equilibrium. The new equilibrium is achieved automatically due to the interaction of supply and demand between economic players with no requirement of governing intervention.
For ex., the Solow growth model shows that the increase in potential output (potential GDP) depends on input accumulation and technology.