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.
There are several ways of calculating market dominance. The most direct is market share. This is the percentage of the total market served 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:
As part of its merger review process, Mexican Competition Commission uses García Alba's 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: