The pencils made out of more expensive wood will sell better if that’s what people want; otherwise, they’ll buy the ones made out of cheaper wood because they’re cheaper.
If you try to sell the cheaper pencils at the more expensive pencils’ price, you lose the information about what people want and meanwhile someone undercuts you and eats your lunch.
How do you decide whether you should care about what kind of wood is used?
Markets!
The pencils made out of more expensive wood will sell better if that’s what people want; otherwise, they’ll buy the ones made out of cheaper wood because they’re cheaper.
If you try to sell the cheaper pencils at the more expensive pencils’ price, you lose the information about what people want and meanwhile someone undercuts you and eats your lunch.