Commodity can be defined as a service or an economic good which has total or partial compatibility, which implies that the instances of market treats is equivalent or nearly equivalent with no regard put to the production. The price related to a commodity is mainly defined as the function of the market where the commodity belongs. The physical commodities which are present in the market have actively traded derivative and spot markets (Adams and Glück 2015). The major commodities include, basic resources, raw materials, agricultural products including, sugar, iron ore or rice. Commodity can be used as a term related to specific economic services or goods that can have partial or full compatibility. The items which belong to the category of non-commodity have many aspects related to the differentiation of the products, like, the user interface, the brand and perceived quality (Algieri and Leccadito 2017).
Commodities can be divided into two different types which include, hard commodities and soft commodities. Soft commodities include those goods which are grown, like, rice or wheat. Hard commodities include goods which are mined, like, gold, oil and helium. Commodities related to energy include, gas, electricity, oil and coal. The major characteristic of differentiating electricity is that it cannot be stored in an economical manner and it needs to consumed immediately after its production (Andreasson et al. 2016).
Commoditization can be defined as the process where the services or goods in the market loses its differentiation across the supply base, by the process of diffusion of intellectual capital which is necessary to produce or acquire it efficiently. The decrease in the margins of the organization in the market is related to the process of commoditization of the products (Brooks, Prokopczuk and Wu 2015).
The commoditization of the products of the organization can be arranged in the following manner,
Huge part of the PC market is occupied by Intel and this makes the organization the least commoditized among the companies. Intel has been able to retain its profits in the market and made its products differentiable from the other products in the market.
The PC industry can be analysed based on the various determinants including the Porter’s Five Forces Framework. The five different factors which are used for the analysis of the market are, power of the suppliers, threats related to the substitutes, power of the buyers, barriers related to entry and rivalry in the market (Chkili, Hammoudeh and Nguyen 2014).
Industry can be defined as the area where the close competitors in a market or a group of firms compete with each other so that the suppliers and the customers can consider the organizations to be close alternatives for each other.
Market can be defined based on the products that are being sold and the geographical area as well. The organizations are considered to be competitors if they manufacture products which are interchangeable. The similarity of the services or products offered by the organizations is a common manner of defining a market (Ewald, Pantelous and Sermpinis 2016).
The kind of goods that are being considered for discussion are products related to PC systems. The PC systems fall in the category of experience goods. These type of goods can be defined as those services or products the value of which can be determined only after using or experiencing the products. The purchase of experience goods is based on the recommendation of the services or products in the market or their reputation. The quality or experience of the previous customers influence the sales of the products in the future as well (Hain, Hess and Uhrig-Homburg 2018).
Commoditization mainly occurs when the customers are able to buy the same products from different large or small business firms. The price of the products or services is the major factor which is related to the differentiation in the market and the quality of the goods does not act as a factor in this case. The organizations in this case cannot raise the prices of the goods as they need to compete with the other players in the market. The commoditization process takes place in many industry sectors. The industries where commoditization occurs frequently are, technology, services, industrial, health care (Henderson, Pearson and Wang 2014).
The major factors that affect the likelihood of the products based on the decision of the consumers are,
The industry that is taken into consideration in this case is the technology industry which faces the issue related to commoditization quite frequently. The five factors that have been discussed above affect the commoditization of products in a huge way. The goods manufactured by an organization are commoditized with the help of the above mentioned factors (Algieri and Leccadito 2017).
De-commoditization is the process related to the presentation of fresh products or commodities with do not have any measurable differences between one another. However, the products are chosen in such a way so that they have a special link between them and are the linked in a strong manner to the issues with the top-priority which include subsistence and sustainability. The de-commoditization of items related to the food market holds a lot of importance in the markets of the developing countries (Brooks, Prokopczuk and Wu 2015). On the other hand, this process is not promoted in the developed markets. De-commoditization is related to safety, health, product valorisation, sustainable markets and sustainable systems of production. The modern environment in which the products are marketed offers many perspectives for de-commoditization of products or goods (Cheng and Xiong 2014).
The firm of a particular segment needs to have higher WTP-C wedge so that the segment can be de-commoditized. WTP is the short form for ‘Willingness to Pay” which is related to the purchase related decision taken by the customers of the particular segment. For example, if a person likes cookies. The box of cookies may be priced (P) at 2.50 dollars and the particular customer loves cookies. The customer is then willing to pay even 2.51 dollars for the same box. However, the major point of discussion will be that whether the customer will pay 2.52 dollars or 2.53 dollars for the product (Ewald, Pantelous and Sermpinis 2016). The major factors related to economics that are to be considered in this case are,
WTP – P = Happiness – which depicts that the difference between the WTP and the P is amount of happiness which is related to the consumer surplus.
P – C = Gross Profit. The difference related to the price and the cost is the gross profit of the firm.
WTP – C = Size of the Wedge – This implies that the more the size of the wedge the happier is the firm and the de-commoditization of the goods are more likely to happen
References
Adams, Z. and Glück, T., 2015. Financialization in commodity markets: A passing trend or the new normal?. Journal of Banking & Finance, 60, pp.93-111.
Algieri, B. and Leccadito, A., 2017. Wave after Wave: Contagion Risk from Commodity Markets.
Andreasson, P., Bekiros, S., Nguyen, D.K. and Uddin, G.S., 2016. Impact of speculation and economic uncertainty on commodity markets. International review of financial analysis, 43, pp.115-127.
Brooks, C., Prokopczuk, M. and Wu, Y., 2015. Booms and busts in commodity markets: bubbles or fundamentals?. Journal of Futures Markets, 35(10), pp.916-938.
Cheng, I.H. and Xiong, W., 2014. Financialization of commodity markets. Annu. Rev. Financ. Econ., 6(1), pp.419-441.
Chkili, W., Hammoudeh, S. and Nguyen, D.K., 2014. Volatility forecasting and risk management for commodity markets in the presence of asymmetry and long memory. Energy Economics, 41, pp.1-18.
Ewald, C.O., Pantelous, A.A. and Sermpinis, G., 2016. Special Issue of Quantitative Finance on ‘Commodity Markets’.
Hain, M., Hess, J. and Uhrig-Homburg, M., 2018. Relative value arbitrage in European commodity markets. Energy Economics, 69, pp.140-154.
Henderson, B.J., Pearson, N.D. and Wang, L., 2014. New evidence on the financialization of commodity markets. The Review of Financial Studies, 28(5), pp.1285-1311.
Prokopczuk, M., Symeonidis, L. and Simen, C.W., 2017. Variance risk in commodity markets. Journal of Banking & Finance, 81, pp.136-149.
Roncoroni, A., Fusai, G. and Cummins, M., 2015. Handbook of multi-commodity markets and products: structuring, trading and risk management. John Wiley & Sons.
Sockin, M. and Xiong, W., 2015. Informational frictions and commodity markets. The Journal of Finance, 70(5), pp.2063-2098
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