Fear of Commodity Hell Spurs Innovation

As you read about market structure, notice that perfect (pure) competition applies to commodity markets. Commodities are standardized products, which are only able to compete on the basis of price. Traditionally, commodities were things like wheat or oil. Today, many product rapidly become commodities. Even the latest computer chip may have only a few months, before competition results in the chip essentially becoming a commodity. If you look at book sales on Amazon.com, you will notice that while a particular book will not be a commodity to the author or publisher (thanks to copyright law), it will be a commodity the to book re-sellers (wholesalers and retailers). Buyers real do not care from whom they buy the book, as long as they receive the book quickly and in good shape.  

Have you noticed the used/surplus book sellers on Amazon, and their five star rating system? This system turns them into commodity sellers, as long as the a seller has a high rating (probably 4.8 to 5.0). If a seller has a rating of 3, they will soon be out of business. (Are you really going to decide to save a dollar and select a seller with a rating of 3?) So, to even be in the business, a seller must give excellent service. With that as a given, price becomes the only point of competition. The book seller is now a commodity seller.  

Do you think that there is an exception for service providers? Think again. Note that the book seller did not produce the book. What the book seller was really doing is providing the service of getting you the book. Excellent service has to be a given, or the seller receives no orders. The other day, I was looking at a website for Utah subcontractors. Guess what, there was that same five star rating system. If you want a plumber, a carpenter, or an electrician they are all there and they are rated. Are you going to select the two star guy to put in your plumbing? I am guessing that the answer is no. This means that to stay in business, subcontractors will have to provide excellent service to attract any business. That leaves price as the focus of the competition. In other words, subcontracting services have effectively become commodities. 

So, what is the strategy to escape what is now being termed "commodity hell?" Innovation is really the only answer. Either you innovate in the way that you produce and supply the commodity, so that your profits are greater than your competitors, who are selling at the same market price, or you must develop new products that provide you with some pricing power for what will inevitably be a limited period of time. Thus, we can see why capitalism has proven to be so much more innovative than centrally controlled economies. It is either innovate of die in the marketplace.