Entrepreneurship

Market Share

Javier Feliú

Javier Feliú

— 2 min read

Basic Market Share

Market share shows how much of a market a single company or a group of companies controls. It’s a useful way to track how well a company is doing compared to its competitors. For instance, if a company improves its product or lowers prices, you can monitor whether it attracts more customers or loses them. The formula is simple:

Market Share = Company Sales ÷ Total Industry Sales

Example:
Imagine a coffee shop that earns $200,000 in revenue, while the entire local coffee market generates $1,000,000. The market share of this coffee shop would be:
Market Share = $200,000 ÷ $1,000,000 = 20%

When measuring sales, most businesses use revenue as the key metric. However, in some industries, sales are measured by units sold instead. For example, in the automotive industry, units sold might matter more than revenue due to varying car prices. Keep in mind that not all sales generate lasting revenue—returns, seasonal spikes, or discounts can impact the numbers. The method you choose depends on your industry and timing.

Concentration Ratios

Concentration ratios measure how much of the market is controlled by the largest companies. These ratios help identify the type of market competition. To calculate, divide the total market share of the top companies by the total industry sales.

Here’s what different concentration ratios mean:

  • Monopoly: One company controls 90% or more of the market.
  • Tight Oligopoly: The top four companies control more than 60%.
  • Loose Oligopoly: The top four companies control 40–60%.
  • Competitive Market: The top four companies control less than 40%.

Generally, the higher the concentration ratio, the less competition exists, and consumers may pay higher prices.

Example:
If the top four companies in a clothing industry have a combined market share of 65%, the market would be classified as a tight oligopoly. On the other hand, if the top four companies only control 30%, it would be considered a competitive market.

Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index, or HHI, is another way to measure competition. Unlike concentration ratios, it factors in all businesses, not just the largest ones. It’s often used by governments to decide if mergers or acquisitions should be approved.

Here’s how to calculate the HHI:

  1. Remove the percentage sign from each company’s market share.
  2. Square each market share.
  3. Add all the squared values together.

The HHI ranges from 0 to 10,000, where 10,000 represents a complete monopoly (one company controlling 100% of the market). Lower values indicate a more competitive market.

Example:
Suppose there are four companies in a market with these shares:

  • Company A: 50%
  • Company B: 20%
  • Company C: 20%
  • Company D: 10%

The HHI is calculated as:

  • 502+202+202+102=2500+400+400+100=340050^2 + 20^2 + 20^2 + 10^2 = 2500 + 400 + 400 + 100 = 3400

An HHI of 3400 indicates a moderately concentrated market. By comparison, an HHI over 5,000 would suggest high concentration, while under 1,500 would indicate high competition.

Until the next one,

J

Read more