Commodities and Commoditization

in LeoFinance2 years ago

commodities are products or services that we can consider interchangeable or at least pretty much interchangeable you give me your product I'll give you mine and no value gain or loss occurs we call this properly fungibility most commodities are unprocessed materials like crude oil lumber cotton and so on however let's assume a pharmaceutical company launches an amazing drug at the beginning its profit margins will be significant but as generic versions appear profit margins go down and the drug in question becomes a commodity this process called commoditization can affect services as well if you're the only guy in town who knows how to change tires you can charge a lot of money and still have customers as more and more people who have the same skill set start offering that service however then once again profit margins go down and the service in question becomes a commodity do keep in mind that fungibility can be in the eye of the beholder for example why a lot of people consider eggs commodities and simply pick the cheapest product other consumers are willing to pay more for an egg based on what the chicken have been fed their living conditions and so on for the most part though a good rule of thumb would be this if most people consider a product or service interchangeable it's probably a commodity