Market competitive pay: Can it be sustained in the long run?

Market Competitive Pay would work in an industry where an employee is considered a commodity, where there is not much scope for differentiation and there is perfect information flow. For e.g. Market competitive pay would work in a BPO/IT services industry where the employee ends up doing the same work, irrespective of a company. It might even work at the freshers level, in case of campus recruitment as more glamor is attached to how much you get, rather than the profile and the work one does.
I don't think paying 10%-20% more than your competitor would be sufficient to hire the required talent at the lateral level. There are too many other factors that one takes into account when considering a new job offer.. rt from the work profile to the company's brand name. Speaking from personal experience, I know of people (more than 1) in the financial industry who have compromised on the pay, accepting a pay 20% less than their current salary for a better profile and better visibility in the company.
Lastly, market competitive pay does work in the short term to attract talent, assuming all other factors remain constant but in the long run, this won't be sustainable, marginal players would be wiped out. Demand would come down, bringing the salaries down too.