Let’s say, you’re selling something for $1000 and giving $400 commission per item to each affiliate (40% commission).

What if people who want to buy your product are smart enough to sign up as your affiliate, buy the product, pay $1000 and get $400 back, thereby ending up paying only $600 nett.

Wouldn’t it spoil the whole affiliate marketing structure?

In your example, you are only going to get $600 in either case. You are always going to be "losing" the $400 as a selling fee to your affiliate. So you have to price your product so that $600 is enuf for you to make a profit and stay in business.

You have hit upon the weakest part of the "affiliate" business model. If you can cut out the middleman, you can save a lot of money. In the 1950’s everything went thru "wholesalers". Now they hardly exist.