Market Share

By: EconomyWatch   Date: 30 June 2010

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Market share implies the proportion of an individual firm’s sales as compared to the total sales in the industry. It could also refer to the share of a particular industry in the overall market. Determination of market share is possible only after a thorough industry/market analysis.

Measurement of Market Share

Market share can be calculated using several bases. However, the most commonly used parameters are:

  • Sales volume (quantity of units sold)
     
  • Sales revenue (quantity sold * cost per unit)

    Advantages of Large Market Share

    Having a large market share in the industry or market yields the following benefits:

  • Economies of scale.
    • More brand awareness among customers.
       
    • Better bargaining position with distributors, suppliers and even customers.
       
    • Access to superior advertising channels at best rates.
       
    • Better technology and R&D.

    Market Share and Market Concentration

    The total number of players in a market and their relative shares determine the degree of market concentration. Alternatively, market concentration implies the percentage of total market value (production), which is owned by the market leaders. If the market share of the industry leaders is large, the market is considered to be highly ‘concentrated.’ On the other hand, a market with several smaller industry leaders is considered ‘fragmented'.

    Market Share versus Market Dominance

    Market share is one of the measures of market dominance. It cannot necessarily be used as a proxy for market dominance. This is because market share does not take into account various factors such as the behavior of consumers, suppliers, the government and competitors.

    Market share can be distinguished from market dominance by using a general percentage criterion, according to which:

    • Market share of over 60% implies market dominance.
       
    • Market share between 35% and 60% implies market strength (not necessarily dominance).
       
    • Market share below 35% represents neither strength nor dominance.

    Most industries generally exhibit a declining scale of market share. This implies that the industry leader generally accounts for about 50% of the share. The second largest player has around 25% of the market share, the third and fourth have 12% and 6%, respectively. The remaining firms have an aggregate share of 7%.

    Market share is used a tool for measuring firm/industry performance, since it abstracts from macro-environmental variables, including the economic state and changes in tax policy. This helps to present a more comprehensive view of the market. Other objectives of measuring market share include the determination of return on investment (ROI), target-rate of profits and the return on assets (ROA).


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