Market shares have long been a controversial topic in economics. Specifically, the controversy is over whether or not market share has any regular relation to profits or unit costs. There are two ways to measure market share: absolute or relative. The former is the percentage of goods a company sells relative to the total goods sold in the entire market. The latter is more complex and more useful -- it is the relation between your own firm's sales versus the sales of your nearest competitors.
A firm's absolute market share is the percentage of units sold or money made relative to all firms in the market. A market share of 20 percent sounds good in general, but in a concentrated market, 20 percent means very little. The absolute share figure says nothing about the market itself, and therefore says nothing about the benefit of the share a firm has achieved.
The relative market share is a more useful metric than absolute market share. The relative market share is determined by taking the amount of sales a company makes and divided this into the total sales of your nearest competitor or two or three competitors. This gives a figure that makes more sense. If the number is above one, then this means that you are the industry leader.
Markets and Profits
Firms generally seek to make profit and ways to increase market share. These two things are not collapsible into profits, since market share has other benefits not related to profits, such as being the market leader. While there is no obvious connection between market share and profits, or return on investment, there is a connection between relative market share and unit costs. Companies that have a relative market share figure of 1 or higher have lower unit costs than their competitors. This diminution in unit costs increases as that figure goes higher than 1. Therefore, again, the relative market share figure is more useful than the absolute figure. Absolute market share is not correlated with any useful economic advantage in terms of unit costs, profits or return on investment.
The purpose of the relative market share figure is to discern the health of the firm. If you are considering investing in a market leading company, you need to figure out how close its competitors are to it. If the market leader sees as reduction in sales, you need to then know far a dip it has to be before one of its rivals takes over as leader. If the company's sales drop and loses it's leading position, chances are this turn of events will depress its stock. Hence, relative corporate market share positions are important when figuring out how much of a hit a firm can take before losing ground.
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