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Michael Mauboussin: Assessing a Company’s Market Power

In this research article, Michael Mauboussin analyzes the concept of market share. In essence, Michael argues that market share is an important but insufficient gauge of competitive advantage.

Stability, concentration, markups, and intangibles provide a more complete picture of the ability to create and sustain excess returns. Industry and company-specific analysis is essential.

Case studies of autos, airlines, internet search, and word processing software illustrate how market share, concentration, stability, and markups evolve differently across industry life cycles and competitive dynamics.

Here are the key takeaways from the article:

  • Market share is an important indicator of a company’s competitive position and potential for sustainable competitive advantage. However, market share alone does not guarantee profitability.
  • Market share stability and concentration provide additional insights into industry dynamics and barriers to entry. Stable market shares and high concentration often coincide with stronger competitive positions.
  • Market power, the ability to price above marginal cost and earn excess profits, is a key driver of profitability. Increasing consumers’ willingness to pay and decreasing suppliers’ willingness to sell can enhance market power.
  • Intangible assets like software are increasingly important sources of competitive advantage for leading firms. They enable scale, complexity management, and differentiation in ways that are hard for rivals to match.
  • Investors should look for companies with lopsided market shares in winner-take-most markets, stable shares in mature industries, strong consumer willingness to pay, and extended periods of market leadership. Adjusting for intangibles is crucial in assessing true economic returns.

Market power measures the degree to which a firm can set its price above its marginal cost. A firm with market power creates value by earning a return above its cost of capital. An expansive view of value creation goes from the customer’s willingness to pay to a supplier’s willingness to sell.

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Disclaimer of liability

The above has been prepared by Børsgade ApS for information purposes and cannot be regarded as a solicitation or recommendation to buy or sell any security. Nor can the information etc. be regarded as recommendations or advice of a legal, accounting or tax nature. Børsgade cannot be held liable for losses caused by customers’/users’ actions – or lack thereof – based on the information in the above. We have made every effort to ensure that the information in the above is complete and accurate, but cannot guarantee this and accept no liability for errors or omissions.

Readers are advised that investing may involve a risk of loss that cannot be determined in advance, and that past performance and price development cannot be used as a reliable indicator of future performance and price development. For further information please contact info@borsgade.dk

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