We live in a time of great subsidies, especially when it comes to ecommerce. Amazon, almost from day one, decided to list products and sell them at either zero or negative gross margin. Years and years of this practice gave it a massive advantage, and slowly forced other retailers to respond as they slashed prices and profits in exchange for theoretically higher revenues.

But the journey didn’t stop at retail prices. It carried over into free shipping, where Amazon once again led the charge with Prime, taking an additional line item that was often sold at break even or even at a profit, and relegating it to another cost center. Amazon fundamentally reshaped the P&L for many brands and retailers—not to mention investors’ expectations for growing, but not always profitable, companies. As with retail prices, other retailers eventually had to follow suit, offering free and fast shipping.

These consumer-focused moves, which the internet rewards by definition, provide exponentially more options to shoppers. This increases competition among retailers, which naturally leads them to reduce prices, driving the flywheel even further. The chain reaction is good for consumers up to a point since they are keeping more money in their pockets while acquiring the same or even better goods. Only if prices were driven so low that the majority companies went out of business would shoppers be in trouble—they’d be beholden to the few that survived, which would inevitably raise prices as they saw fit after consolidating power.  

But for retailers, price pressure often forces them to decrease margins to gain market share. In the past few years, prices for consumer goods sold online rose more slowly than the Consumer Price Index expected—a deflation spurred by the price competition and comparison shopping associated with ecommerce itself. Retailers are stuck, lowering prices to compete, which subsequently harms their own businesses and longer-term abilities to compete.

What happens if this trend continues? Will margins be forced so close to zero that competition among brands and companies is rendered extraneous? This risk is strongest in commodity markets, particularly within the ecosystems of Amazon, Walmart and Alibaba, where companies are racing to the bottom in a way that is entirely logical in the name of revenue, but irrational in the name of longevity.

In non-commodity markets, where brands and their products can command a premium that is not as correlated to production costs or competitors, this race to the bottom is less of a threat, but it still exists. While more commodity players have walked off a cliff, plunging their businesses into chaos, premium business are slowly slipping down the hill.

Let’s look at the suitcase market for comparison. Amazon sells its AmazonBasics private-label suitcase for $99.99, and most of the commodity-driven offerings from other brands on the platform are between $60 to $150. Away and its competitors start around $225 and go up from there, while Tumi hovers between $500 to $800 and Rimowa comes in between $600 and $1,300. Other luxury brands such as Goyard and Louis Vuitton sell the same product for thousands of dollars more.

Despite the wide range, the strongest price pressure is at the bottom, trailing off as prices reach the top end. But the low-end prices that continue to decrease make it harder for most consumers (excluding the ultra-wealthy) to even consider paying for the middle- and higher-end products, pushing price points further downstream and making customers more price sensitive. Away experiences pressure from the endless private-label versions that offer a similar product at one-half to one-third of the price. Meanwhile, Tumi and Rimowa experience downward pressure because of the Aways of the world, as well as private labels. And, even at the top, Louis Vuitton, Goyard and Gucci are pressured because of everything that comes before them.

With this in mind, brands of all sizes and origins are putting more money in to marketing, retail and value-added services in order to differentiate and still grow. Since the investment is often front-loaded for these activities, they hurt margins and profits in the short term. The real question, then, is whether these investments will pay off and the profits and margins will recover in the long term. Or maybe we’re in a new normal where costs continue rising as competition continues increasing—and margins race toward zero.