There are several ways of calculating market dominance. The most direct
is market share. This is the percentage of the total market serviced by a
firm or brand. A declining scale of market shares is common in most
industries: that is, if the industry leader has say 50% share, the next
largest might have 25% share, the next 12% share, the next 6% share, and
all remaining firms combined might have 7% share.
Market share is not a perfect proxy of market dominance. The influences
of customers, suppliers, competitors in related industries, and
government regulations must be taken into account. Although there are no
hard and fast rules governing the relationship between market share and
market dominance, the following are general criteria:
* A company, brand, product, or service that has a combined market
share exceeding 60% most probably has market power and market dominance.
* A market share of over 35% but less than 60%, held by one brand,
product or service, is an indicator of market strength but not
necessarily dominance.
* A market share of less than 35%, held by one brand, product or
service, is not an indicator of strength or dominance and will not raise
anti-competitive concerns by government regulators.
Market shares within an industry might not exhibit a declining scale.
There could be only two firms in a duopolistic market, each with 50%
share; or there could be three firms in the industry each with 33%
share; or 100 firms each with 1% share. The concentration ratio of an
industry is used as an indicator of the relative size of leading firms
in relation to the industry as a whole. One commonly used concentration
ratio is the four-firm concentration ratio, which consists of the
combined market share of the four largest firms, as a percentage, in the
total industry. The higher the concentration ratio, the greater the
market power of the leading firms.
Alternatively, there is the Herfindahl index. It is a measure of the
size of firms in relation to the industry and an indicator of the amount
of competition among them. It is defined as the sum of the squares of
the market shares of each individual firm. As such, it can range from 0
to 10,000, moving from a very large amount of very small firms to a
single monopolistic producer. Decreases in the Herfindahl index
generally indicate a loss of pricing power and an increase in
competition, whereas increases imply the opposite.
