| Somewhat related and something I've thought about over the years: "Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well. Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth. If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it. Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it. And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen. For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening." -Charlie Munger http://ycombinator.com/munger.html |
With consumables (which includes things like cereal), you decide which brand to purchase, and you use or consume it. Then, the next time you need it, you must decide again which to buy and have virtually no downside to purchasing a different brand (no lock-in from the previous purchase).
With one-time-ever purchases (which I think includes subscriptions or recurring purchases where there is a barrier to switching, including games where you have saved progress through levels and rack up points or a high-score), you decide once and then stick with it. I think that's where competition can easily pivot from healthy for a business to merciless.
Then there are things like airline seats which are technically commodities, but not entirely. With airline seats, there are barriers to information (such as being able to use e.g. Kayak to compare prices, but having Spirit excluded from Kayak within the US means you must know to also check Spirit's site), and there are MVP and rewards programs and airline miles, etc, and there is also quality and ammenities, and the fact that you never know how much a ticket with luggage and a snack is going to cost until you go through the entire checkout process (and who has time to do that for all options). So, airline seats seem like they should be commodities, but they really aren't.