What Is Commoditization?
Commoditization refers to the process of making something proper right into a commodity. Further broadly, commodification is taking something that previously was not available to be had available in the market and making it so, as an example the commoditization of the foods chain has presented many further foods to {the marketplace}, then again has left small producers in the back of in desire large, low value producers.
Commoditization moreover steadily gets rid of the individual, unique characteristics, and emblem identity of the product so that it becomes interchangeable with other products of the equivalent type. Making commodities interchangeable shall we in competition with a basis of value simplest and not on different characteristics.
When a financial contract harking back to a mortgage becomes commoditized, the contract becomes further liquid because of it can be bought and presented readily. This liquidity promotes purchasing and promoting in that market given that agreements would not have to be assessed individually and treated uniquely.
Key Takeaways
- Commoditization is the process of fixing products or services and products and merchandise into standardized, marketable units.
- This process tends to strip away unique or understanding qualities of the commodity in desire of equivalent, inexpensive worth items that can be interchanged with one another.
- Financial products will also be commoditized, as an example all the way through the securitization of mortgages or other particular person loans into pooled investment products.
Figuring out Commoditization
A commodity is a basic superb used in industry that is interchangeable with other commodities of the equivalent type.
Commoditization is an movement converts products, in conjunction with financial products, into such an interchangeable and marketable products, such that it strips a superb or service of differentiating characteristics. The great or service becomes indistinguishable from others in that exact same magnificence.
Commoditization may happen with a product, service or protection, then again in all instances 3 conditions must be met for a superb or service to turn out to be a commodity:
- Standardized gets rid of permutations. Agricultural products must be in a raw state. As an example, corn is a commodity, then again delicate corn syrup is not.
- The item must be usable when purchased, without requiring processing or alterations. Corn is a commodity, then again stalks of corn on the cob throughout the husk is not.
- Products must vary enough in value {{that a}} market develops for it. Corn is a commodity given that value fluctuates and changes, then again an products which costs the same amount without law or pressures is not.
Commoditization lends itself when a superb or service can be standardized enough to be purchased as a transaction instead of customized. In finance, a financial contract harking back to a bond or loan undergoes commoditization when it is not essential to turn out to be concerned with all the more than a few words of the bond or loan. Believe an example of a mortgage, where the loan can be unique to the borrower, then again a commodity to an investor who buys mortgages as investments and then swimming swimming pools them together in mortgage subsidized securities (MBS), which could be then carved up and presented to new consumers. When financial products are commoditized, it steadily goes in the course of the identify securitization.
Result of Commoditization
Commoditization creates a further liquid market because it makes it easier to buy and advertise without reference to the commodity is. Without involved product sales processes in step with differentiation and emblem identities or particular person characteristics, purchases of the commodity turn out to be transactional and more uncomplicated, they generally building up in amount. This better selling amount may create further variability in the price of the commodity, nevertheless it undoubtedly moreover generates further task and injects cash into {the marketplace}.
Returning to the example of mortgage loans, the rise in buying and selling of the ones loans will build up the amount of cash circulating and available. Will build up in cash flows allow banks and other lenders to put in writing further loans to further borrowers. This building up is in reality helpful for the industry as an entire along with for borrowers.
Critics, alternatively, argue that commoditization may have some uncomfortable negative effects, thru eliminating unique or customized products large firms come to dominate while small or craft producers are actually now not able to compete. Commoditization of certain problems may also be deemed immoral or unethical, as an example thru creating a market for body parts, spouses, or even something a trifling as together with a fee to a prior to now free town park.
