Definition of commoditize
1 : commodify commoditizing bandwith; specifically : to render (a good or service) widely available and interchangeable with one provided by another company
2 : to affect (something, such as a brand or a market) by commoditizing goods or services fierce competition threatened to commoditize prices
commoditizationplay \kə-ˌmä-də-tə-ˈzā-shən\ noun
Recent Examples of commoditize from the Web
Standardized benefit designs threaten to commoditize insurance and stifle innovation, while potentially misleading consumers.
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Financial Definition of COMMODITIZE
What It Is
Commoditization refers to a good or service becoming indistinguishable from similar products.
How It Works
An item should satisfy 3 conditions to be considered a commodity: 1) it must be standardized and, for agricultural and industrial commodities, in a "raw" state; 2) it must be usable upon delivery; and 3) its price must vary enough to justify creating a market for it.
Most people understand commoditization when it comes to corn, soybeans, cotton, or other raw materials (i.e., the idea that "it's all the same."). But financial instruments can be commoditized, too.
For example, in the past, every mortgage issued was considered unique -- that is, the terms and conditions of the loans were specialized according to the borrower and the property. But over time, the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae) commoditized mortgages by offering to buy almost any mortgage that met a set of conforming standards. By creating a massive market for mortgages, these agencies encouraged banks to streamline and standardize the types of mortgages they offer to consumers.
Why It Matters
Commoditization makes an asset easier to trade and encourages a more liquid market. In some cases, this can add volatility to the price of the commoditized entity, but in other cases it can spur economic activity.
In the case of the mortgage industry, commoditization allows lenders to receive cash from selling conforming mortgages to government agencies and government-sponsored entities. The banks can then use the cash to issue more loans, theoretically spurring economic growth.
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