Capitalist economies are characterized by many different firms that compete for the business of consumers. Market share is an important concept related to competition and economics that describes the proportion of a certain market that a business controls. Market share erosion occurs when a business loses market share over time.
Market Share Basics
One of the primary goals of a business is to sell more products and services to more customers and increase the overall percentage of the market that buys a certain good or service from the business. The pool of customers in any market is divided amount the firms that provide the good or service associated with the market that determines each firm's market share. For example, if firm A had 60 percent of the cellphone customers in a certain town and firm B had 40 percent of the customers, their market shares would be 60 percent and 40 percent, respectively. If Firm A’s market share drops to 55 percent, it has experienced market share erosion.
Causes of Market Share Erosion
Business can lose market share to other companies for many reasons. The rise of new competitors in an industry can lead to market share erosion. Events that affect the public's view of a company and its products can also create market share erosion. For example, if a report is released that shows a certain fast food chain does not follow federal food safety guidelines, some consumers might avoid the chain, causing its market share to erode. Inferior products or a failure to adapt to changes in technology and consumer preferences can also cause market share erosion.
Market Share Erosion and Competition
Market share erosion may signify increasing or decrease in competition. When a large company loses market share, it means smaller companies are gaining market share, which typically results in more competition. On the other hand, if smaller companies experience market share erosion, it may mean that larger companies are increasing their market shares. If market shares drop too low, companies may become unprofitable and drop out of the market, which can lead to less competition.
The U.S. government regulates competition and attempts to prevent uncompetitive behaviors. For example, if two large phone companies like AT&T and Verizon attempted to merge, the government might step in and prevent the merger because it could reduce competition and hurt consumers.