Dominance (economics)
Encyclopedia
Market dominance is a measure of the strength of a brand
, product
, service, or firm
, relative to competitive offerings. There is often a geographic element to the competitive landscape. In defining market dominance, you must see to what extent a product, brand, or firm controls a product category in a given geographic area.
. 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:
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.
Kwoka's dominance index (D) is defined as the sum of the squared differences between each firm's share and the next largest share in a market:
where
for all i = 1, ..., n - 1.
As part of its merger review process, Mexican Competition Commission uses dominance index (ID), described as the Herfindahl index
of a Herfindahl index
(HHI). Formally, ID is the sum of squared firm contributions to the market HHI:
where 
European Commission
's Tenth Report on Competition implies that a significant disparity between the largest and the second-largest firm shares can indicate that the largest firm has a dominant position in the market. Specifically, under a section entitled "Scrutiny of mergers for compatibility with Article 86 EEC," the Report states:
Asymmetry Index (AI) is defined as the statistical variance
of market shares:
Further back in history, the majority of goods which became identified with the task had significant market dominance - Kodak, Instamatic, Hornby, Scalextric, Meccano to name a few.
Brand
The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
, product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
, service, or firm
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, relative to competitive offerings. There is often a geographic element to the competitive landscape. In defining market dominance, you must see to what extent a product, brand, or firm controls a product category in a given geographic area.
Calculating
There are several ways of calculating market dominance. The most direct is market shareMarket share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
. 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
Duopoly
A true duopoly is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a 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
Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...
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
Herfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
. 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
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
producer. Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.
Kwoka's dominance index (D) is defined as the sum of the squared differences between each firm's share and the next largest share in a market:
where
for all i = 1, ..., n - 1.As part of its merger review process, Mexican Competition Commission uses dominance index (ID), described as the Herfindahl index
Herfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
of a Herfindahl index
Herfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
(HHI). Formally, ID is the sum of squared firm contributions to the market HHI:
where European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
's Tenth Report on Competition implies that a significant disparity between the largest and the second-largest firm shares can indicate that the largest firm has a dominant position in the market. Specifically, under a section entitled "Scrutiny of mergers for compatibility with Article 86 EEC," the Report states:
- A dominant position can generally be said to exist once a market share to the order of 40% to 45% is reached. [footnote: A dominant position cannot even be ruled out in respect of market shares between 20% and 40%; Ninth Report on Competition Policy, point 22.] Although this share does not in itself automatically give control of the market, if there are large gaps between the position of the firm concerned and those of its closest competitors and also other factors likely to place it at an advantage as regards competition, a dominant position may well exist. (European Commission's Tenth Report on Competition, page 103, paragraph 150.)
Asymmetry Index (AI) is defined as the statistical variance
Variance
In probability theory and statistics, the variance is a measure of how far a set of numbers is spread out. It is one of several descriptors of a probability distribution, describing how far the numbers lie from the mean . In particular, the variance is one of the moments of a distribution...
of market shares:
Examples
Here are some examples of market dominant products:- Adobe FlashAdobe FlashAdobe Flash is a multimedia platform used to add animation, video, and interactivity to web pages. Flash is frequently used for advertisements, games and flash animations for broadcast...
- Adobe PhotoshopAdobe PhotoshopAdobe Photoshop is a graphics editing program developed and published by Adobe Systems Incorporated.Adobe's 2003 "Creative Suite" rebranding led to Adobe Photoshop 8's renaming to Adobe Photoshop CS. Thus, Adobe Photoshop CS5 is the 12th major release of Adobe Photoshop...
- Apple iPodIPodiPod is a line of portable media players created and marketed by Apple Inc. The product line-up currently consists of the hard drive-based iPod Classic, the touchscreen iPod Touch, the compact iPod Nano, and the ultra-compact iPod Shuffle...
portable media players - FacebookFacebookFacebook is a social networking service and website launched in February 2004, operated and privately owned by Facebook, Inc. , Facebook has more than 800 million active users. Users must register before using the site, after which they may create a personal profile, add other users as...
Social Networking - Microsoft WindowsMicrosoft WindowsMicrosoft Windows is a series of operating systems produced by Microsoft.Microsoft introduced an operating environment named Windows on November 20, 1985 as an add-on to MS-DOS in response to the growing interest in graphical user interfaces . Microsoft Windows came to dominate the world's personal...
, Microsoft OfficeMicrosoft OfficeMicrosoft Office is a non-free commercial office suite of inter-related desktop applications, servers and services for the Microsoft Windows and Mac OS X operating systems, introduced by Microsoft in August 1, 1989. Initially a marketing term for a bundled set of applications, the first version of... - Intel personal computer processors
- GoogleGoogleGoogle Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
Internet search - CiscoCiscoCisco may refer to:Companies:*Cisco Systems, a computer networking company* Certis CISCO, corporatised entity of the former Commercial and Industrial Security Corporation in Singapore...
Ethernet switching - Dolby audio technologies
- ARM mobile phone chips
- L'Oréal GroupL'OréalThe L'Oréal Group is the world's largest cosmetics and beauty company. With its registered office in Paris and head office in the Paris suburb of Clichy, Hauts-de-Seine, France, it has developed activities in the field of cosmetics...
- the world's largest cosmetics and beauty company
Further back in history, the majority of goods which became identified with the task had significant market dominance - Kodak, Instamatic, Hornby, Scalextric, Meccano to name a few.