Examining Why and When Market Share Drives Firm Profit

Abstract

Many firms use market share to set marketing goals and monitor performance. Recent meta-analytic research reveals the average economic impact of market share performance and identifies some factors affecting its value. However, empirical understanding of why any market share–profit relationship exists and varies is limited. The authors simultaneously examine the three primary theoretical mechanisms linking firm market share with profit. On average, they find that most of the variance in market share’s positive effect on firm profit is explained by market power and quality signaling, with little support for operating efficiency as a mechanism. They find a similar explanatory role of the three mechanisms in conditions where market share negatively predicts profit (for niche firms and those “buying” market share). Using these mechanism insights, the authors show that the value of market share differs in predictable ways between firms and across industries, providing new understanding of when managers may usefully set market share goals. The authors also provide new insights into how market share should be measured for goal setting and performance monitoring. They show that revenue market share is a predictor of firm profit while unit market share is not, and that relative measures of revenue market share can provide greater predictive power.