Difficulties in measuring market share accurately

Overview

How geographic boundaries complicate the measurement of market share, multi-product firms make market share measurement difficult and why vertically integrated production complicates the measurement of a market.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why is defining the boundary of a market the central difficulty in measuring market share?

   Model answer

   Market share is a firm's sales divided by total market sales, so the answer depends entirely on what is counted in the denominator. A firm producing fruit juice has a large share of the chilled orange juice market, a smaller share of all soft drinks and a very small share of all beverages. Since none of these definitions is uniquely correct, the same firm can be described as dominant or marginal depending on the boundary chosen.

2. 2

   How should substitutability guide the definition of a market?

   Model answer

   Two products belong in the same market if buyers would readily switch between them in response to a change in relative price, because it is that willingness to switch that constrains a seller's pricing. Goods that customers do not regard as alternatives impose no such constraint and belong in separate markets. The test is therefore behavioural, resting on how consumers actually respond, which is why market definition needs evidence rather than assertion.

3. 3

   Analyse how geographic boundaries complicate the measurement of market share.

   Model answer

   A firm may hold a large share of sales in one town, a moderate share nationally and a negligible share across Europe, and each figure is accurate for the area it describes. The right boundary depends on how far customers will travel and how far goods can be economically transported, so a bakery's market is local while a steel producer's is international. Choosing too wide an area understates a firm's real power over its customers, while choosing too narrow an area overstates it.

4. 4

   Why has online selling made market share harder to measure?

   Model answer

   Online sellers can supply customers anywhere, so the geographic boundary that once defined a market has blurred and a purely local calculation no longer captures the competition a shop faces. Sales made through overseas platforms may not appear in national statistics at all, so total market size is understated and domestic firms' shares are overstated. Comparing an online seller with a physical retailer also requires deciding whether they are in the same market at all, which depends on whether customers treat them as alternatives.

5. 5

   How do imports and exports distort market share figures based on production data?

   Model answer

   Production data record what domestic firms make, whereas market share should record what is sold in the market being analysed. Counting only domestic production ignores imports, so domestic firms appear to hold more of the market than they do, and it wrongly includes exports, which are sold to entirely different customers. An accurate figure requires sales in the defined territory, which means adding imports and deducting exports from domestic production.

6. 6

   Why do multi-product firms make market share measurement difficult?

   Model answer

   A firm selling many products across several markets does not usually publish sales broken down by individual product or by market. Analysts must therefore estimate how its total turnover divides, which introduces error. Shared costs and joint production also make it unclear how much of the firm's activity should be attributed to any one market.

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