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Commoditization

COMMODITIZATION

Commoditization is the dilution of a market sector's internal differentiation and competitive nuances in favor of a mass market where price alone determines consumer behavior. The industry's mode of competition thus moves away from innovation of the underlying, commoditized product and toward alternative methods of building value.

As industries mature, barriers to market entry gradually erode, competition intensifies, and the market becomes saturated, forcing prices downward. In the eye of the consumer, there is increasing parity among a market sector's products and services, and building customer loyalty becomes all the more challenging. As the proliferation of products within a market sector reaches the commoditization point, the perceived distinction between brands and varieties vanishes altogether, and customers base their purchasing decisions solely on price. This in turn leads to a pricing war that wreaks havoc on profit margins. To combat commoditization, firms generally seek out new operating models, bundle services to add value, or diversify or specialize their product to capture a niche market within a broader market. If all else fails, firms may simply cut realized or potential losses by exiting the market.

The Internet's relationship to commoditization is something of a paradox. On one hand, the Internet provided a vehicle in which firms could escape commoditization of their products and services by opening new areas of competition. Firms shifted their business plans, often very rapidly, to quickly capitalize on the possibilities afforded by the Internet in fear of losing market share to rivals that were quicker to adapt. The avalanche that ensued, however, created another form of commoditization. Many firms simply established their online presence with too little attention to how to successfully integrate the Web into their existing operations, or how to distinguish their online storefronts from those of others. This process was greatly accelerated by the emergence of the World Wide Web as a medium of commerce, making transactions, comparison shopping, and bidding quick and effortless.

In the sort of mass merchandising that regularly takes place as industries mature and begin to consolidate through mergers and acquisitions, products and services grow more removed from the level of the customer, particularly in services, where the personal touch provided by local companies is replaced by larger national or multinational outfits. Meanwhile, personal dealings with customers are streamlined and mechanized in order to boost customer rolls and margins. This brings about a different sort of commoditization that requires careful remediation. Once again, the Web is a double-edged sword in this case. On one hand, it furthers this process since customer service is thoroughly mechanized and removed from the face-to-face medium. This dramatically decreases the firm's transaction costs and offers convenience to the customer. For those reasons, the Web has been vigorously embraced by firms across many industries. However, it also tends to erode any sense of personal connection to the firm.

A thoroughly commoditized market within the Internet spectrum was telecommunications bandwidth for high-speed Internet access. In this sector, commoditization was not so much fought as it was incorporated. The telecommunications industry established the Bandwidth Trading Organization to coordinate the trading of bandwidth in a manner similar to energy commodities. Such trading would facilitate the implementation of sophisticated financial tools that could manage market risk and generate stronger returns, much as is done in other financial markets.

There is no formula for combatting commoditization; how it is dealt with largely depends on the nature of the industry and the mode of competition therein. Commoditization is less likely to infect markets that require more capital investment to enter, such as heavy manufacturing. But even those industries are affected by burgeoning online business-to-business marketplaces. The capital investment required to enter into the modern information technology and computer software industries, meanwhile, is relatively small. As technology develops, it gets smaller all the time. Companies can distinguish themselves and stay a step ahead of industry commoditization by augmenting their brick-and-mortar operations with their online operations, rather than allowing online storefronts to eat into existing sales channels. The latter often was the case in the 1990s and early 2000s. One way or another, commoditization was a fact of life in the Internet economy, and how firms adjust will largely determine whether they have a place in it.

FURTHER READING:

Colvin, Goeffrey. "You Could Soon Be Selling Soybeans." Fortune. November 13, 2000, 80.

King, Julia. "Businesses Weigh Pros and Cons of Web Marketplaces." Computerworld. March 13, 2000, 28.

. "Dodging the Commodity Bullet." Telephony. January 19, 2001, 42.

Schmerken, Ivy. "The Challenge: Coping With Commoditization." Wall Street & Technology. January 2001, 54.

Surowiecki, James. "The Commoditization Conundrum." Slate. January 29, 1998. Available from: slate.msn.com / MotleyFool/98-01-29.

Vincent, Lynn. "The Brand That Binds." Bank Marketing. November 2000, 24.

SEE ALSO: Channel Conflict/Harmony; Channel Transparency

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Commodity Futures Trading Commission

COMMODITY FUTURES TRADING COMMISSION

The Commodity Futures Trading Commission (CFTC), the federal regulatory agency for futures trading, was established by the Commodity Futures Trading Commission Act of 1974 (88 Stat. 1389; 7 U.S.C.A. 4a), approved October 23, 1974. The commission began operation in April 1975 and its authority to regulate futures trading was renewed by Congress in 1978. Its authority was again renewed with the Commodity Futures Modernization Act of 2000, which also mandated major reforms of the commission. The CFTC maintains a comprehensive web site at <http://www.cftc.gov>.

The CFTC consists of five commissioners who are appointed by the president with the advice and consent of the Senate. The commissioners serve staggered five-year terms and by law no more than three commissioners can belong to the same political party. One commissioner is designated by the president to serve as chairperson. The chair's staff includes the Office of the Inspector General and the Office of International Affairs.

To comply with the requirements of the Modernization Act, the commission underwent a restructuring in 2002. As a result, it consists of six major operating units: the Division of Clearing and Intermediary Oversight, the Division of Market Oversight, the Division of Enforcement, the Office of the Chief Economist, the Office of the General Counsel, and the Office of the Executive Director.

The CFTC regulates trading on the 11 U.S. futures exchanges, which offer numerous kinds of futures contracts. It also regulates the activities of some three thousand commodity exchange members, 360 public brokerage houses (futures commission merchants), about 38,000 commission-registered futures industry salespeople and associated persons, and 2,500 commodity trading advisers and commodity pool operators. Some off-exchange transactions involving instruments similar in nature to futures contracts also fall under CFTC jurisdiction.

The commission's regulatory and enforcement efforts are designed to ensure that the futures trading process is fair and that it protects both the rights of customers and the financial integrity of the marketplace. The CFTC approves the rules under which an exchange proposes to operate and monitors exchange enforcement of those rules. It reviews the terms of proposed futures contracts and registers companies and individuals who handle customer funds or give trading advice. The commission also protects the public by enforcing rules that require that customer funds be kept in bank accounts separate from accounts maintained by firms for their own use, and that such customer accounts be marked to present market value at the close of trading each day.

Futures contracts for agricultural commodities were traded in the United States for more than one hundred years before futures trading was diversified to include trading in contracts for precious metals, raw materials, foreign currencies, commercial interest rates, and U.S. government and mortgage securities. Contract diversification has grown in exchange trading volume, a growth not limited to the newer commodities.

The CFTC maintains large regional offices in Chicago and New York, cities in which eight of the nation's 11 futures exchanges are located. Smaller regional offices are located in Kansas City and San Francisco, and there is a suboffice of the Chicago regional office in Minneapolis.

further readings

Commodity Futures Trading Commision. 2002 Annual Report. Available online at <www.cftc.gov/files/anr/anr2002.pdf> (accessed June 1, 2003).

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commodity market

commodity market, organized traders' exchange in which standardized, graded products are bought and sold. Worldwide, there are 48 major commodity exchanges that trade over 96 commodities, ranging from wheat and cotton to silver and oil. Most trading is done in futures contracts, that is, agreements to deliver goods at a set time in the future for a price established at the time of the agreement. Futures trading allows both hedging to protect against serious losses in a declining market and speculation for gain in a rising market. For example, a seller may sign a contract agreeing to deliver grain in two months at a set price. If the grain market declines at the end of two months, the seller will still get the higher price quoted in the futures contract. If the market rises, however, speculators buying grain stand to profit by paying the lower contract price for the grain and reselling it at the higher market price. Spot contracts, a less widely used form of trading, call for immediate delivery of a specified commodity and are often used to obtain the goods necessary to fulfill a futures contract. An independent U.S. regulatory agency, the Commodity Futures Trading Commission was established in 1974 to regulate commodity markets. In 1982, the Chicago Mercantile Exchange introduced a futures contract for Standard & Poor's 500 U.S. companies that allows investors to speculate on the future prices of those stocks. Trading of S&P 500 and other financial futures has broken down some of the barriers that once separated stock, bond, and commodity markets and made it easier for investors to hedge their stock investments. Critics charge that the futures trading at the commodity markets in Chicago has made stock prices more volatile. The Chicago Board of Trade is the largest futures and options exchange in the United States, the largest in the world is Eurex, an electronic European exchange.

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Grain Futures Act

GRAIN FUTURES ACT

GRAIN FUTURES ACT. The Grain Futures Act, passed on 21 September 1922, reestablished government control over commodity exchanges, which had been nullified by invalidation of the act of 24 August 1921 (Hill v. Wallace, 259 U.S. 44 [1922]). Omitting tax provisions, Congress reenacted similar regulations, based solely on the power to regulate interstate commerce, which were upheld by the Supreme Court in an assertion of the "stream-of-commerce" doctrine (Chicago Board of Trade v. Olsen, 262 U.S. 1 [1923]). The Grain Futures Administration assisted the secretary of agriculture in enforcement of the provision that all trading in grain futures must be at grain exchanges designated as contract markets submitting daily reports. The Commodity Exchange Act of 15 June 1936 further expanded federal control over other agricultural products by eliminating the exemptions for owners and growers of grain and their associations. This act was superseded in 1974 by the Commodity Futures Trading Commission Act.

BIBLIOGRAPHY

Fite, Gilbert Courtland. George N. Peek and the Fight for Farm Parity. Norman: University of Oklahoma Press, 1954.

Saloutos, Theodore, and John D. Hicks. Agricultural Discontent in the Middle West, 1900–1939. Madison: University of Wisconsin Press, 1951.

George C.Robinson/t. m.

See alsoAgriculture ; Commerce Clause ; Exchanges .

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commodity market

commodity market Market in which goods or services are bought and sold. Commodities are raw materials such as tea, rubber, tin or copper, which generally need processing to reach their final state. The actual commodities are seldom present, and what is traded is their ownership. The largest commodity exchange in the world is in Chicago, Illinois.

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