One important conclusion is that the more differentiated a product is, and therefore less competition it has to contend with, the greater that company's profit margins.

I think Citigroup's position on the list of Dow companies ordered by profit margin belies this theory — there is nothing more commodified than borrowing and lending, since money is the most fungible commodity around (pretty much by definition; if another good was a better means of exchange, we would use it as money instead). Perhaps returns on capital would be a better indicator of differentiated products, since returns on capital measure how high returns would be for a competitor, if this competitor could do everything the given company does?

I think the theory is basically right, but if it is not expanded to deal with cost-of-capital and return-on-capital, it is going to lead to errors when applied to industries with unusual ratios of sales to assets.


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