Two loaves of bread off the same line are perfect substitutes for each other, and compete to be sold.

Lines of code within the same code base aren't competing to be sold. They either complement each other by adding new features, making the actual product sold more valuable, or one replaces another to make a feature more desirable- look better, work faster, etc.

The market grows if you add new features- your bread now doubles as a floatation device- or you introduce a new line of bread with nuts and berries.

So, the business has to decide- does it fire some workers and pocket the difference until someone else undercuts them, or does it keep the workers and grow the market it can sell to faster?

Adding new features doesn't necessarily grow the market. Your bread with nuts and berries competes with the regular bread for the customer's money. Other things also compete for the same money, such as medical, daycare, schooling etc. So increasing features won't necessarily grow the market because the market. Even in an optimistic scenario, those features only have a probability of increasing revenue, it's not certain.

OTOH, if you fire those workers, it is a certainty that your bakery gets more cash. You can then use that cash to reward your shareholders (a category that conveniently includes you) via buybacks or dividends.

Read the comment I replied to to see where the bread came from.

But on your point (which seems to hinge on wish thinking), this infinity of new features you propose for every product still needs those new markets you take for granted to justify their inclusion in the product. However cornering a new market isn't as straightforward as deploying a new feature - we all wish it was. The tech that makes it trivial for one firm to develop these features, makes it trivial for everyone else to build them. This means any new market will be immediately saturated.

Even if the leap of finding new markets was as easy as you think, you still need to explain why this hypothetical company would keep paying millions in avoidable salaries. Because whatever jobs you assign to AI, it won't be any less available to do the work of the human labor.