134  Return on Invested Capital
learning how to work with particular brands of financial terminals are often 
reluctant to learn another system. An installed base can be a powerful driver 
of competitive advantage.
Rational Price Discipline  In commodity industries with many competitors, 
the laws of supply and demand will drive down prices and ROIC. This ap-
plies not just to obvious commodities—say, chemicals and paper—but also to 
more recently commoditized products and services, such as airline seats. It 
would take a net increase of only 5 to 10 percent in airline ticket prices to turn 
the industry’s aggregate loss to an aggregate profit. But each competitor is 
tempted to get an edge in filling seats by keeping prices low, even when fuel 
prices and other costs rise for all competitors. In the past several years, the 
airline sector in the United States has rapidly consolidated and become more 
cautious about adding seat capacity. That has allowed U.S. airlines to operate 
at more attractive price levels and earn healthy returns on capital. In contrast, 
most European airlines still face strong price competition and are rarely able 
to earn returns on capital above their cost of capital.
Occasionally, we find an example such as the U.S. airline industry that 
manages to overcome the forces of competition and set its prices at a level that 
earns its companies reasonable returns on capital (though rarely more than 
15 percent) without breaking competition law. For example, for many years, 
almost all real estate agents in the United States charged a 6 percent commis-
sion on the price of each home they sold. In other cases, government sanctions 
disciplined pricing in an industry through regulatory structures. Until the late 
1990s, airline fares in Europe were high because in most national markets, 
foreign competitors faced restrictions when competing with domestic airlines. 
Prices collapsed when the European airline markets were fully deregulated 
in 1997.
Rational, legitimate pricing discipline typically works when one competi-
tor acts as the leader and others quickly replicate its price moves. In addition, 
there must be barriers to new entrants, and each competitor must be large 
enough that a price war will surely reduce the profit on its existing volume by 
more than any extra profit gained from new sales. If there are smaller competi-
tors with more to gain from extra volume than they would lose from lower 
prices, then price discipline will be very difficult to maintain.
Most attempts by industry players to maintain a floor price fail. Take the 
paper industry, for example. Its ROIC averaged less than 10 percent from 
1990 to 2013. The industry created this problem for itself because the com-
panies all tended to expand at once, after demand and prices had risen. As a 
result, a large chunk of new capacity came on line at the same time, upsetting 
the balance of supply and demand and forcing down prices and returns.
Even cartels (which are illegal in most of the world) find it difficult to 
maintain price levels, because each cartel member has a great incentive to