Relationship Between Market Share and Profitability

A study of profitability has confirmed that a single relationship between return on investment (ROI), or profit, and market share does not exist. Some research has imposed a linear relationship between ROI and market share, but that is a poor representation of data. Empirical evidence suggests three observations on the relationship of ROI to market share. First, businesses with a small market share are not necessarily less successful than larger firms. However, in service companies and organizations in markets for raw or semi-finished materials, small businesses are just as or more profitable than larger firms. Second, some businesses seem to be stuck in the middle. Third, companies with a very large market share are less profitable, with 65% to 70% being a critical market share.

Using structure equations and PLS software, this study examines this relationship for superior firms (considering their sales). Finally, this research finding indicate the relationship between market share and profitability depends upon restrictive statistical assumption and share tips, when these assumption are relaxed, the result show that there is no significant direct association between market share and profitability, and spurious effects account for at least a sizable component of the measured association. Also the finding of this research proved association between profitability and growth industry, short-term firm growth, prior performance, general economic activity and the finding indicate there is a strong association between current year return and return from the prior year.

This study extends earlier empirical work to determine whether there is a breakpoint or critical level in the frequently observed relationship between firm market share and profit rate. The analysis focuses on the banking industry and uses a sample of 10,690 firms located in 2165 different local geographic markets. Though the results apply directly only to banking, the similarity of findings on various other industrial organization topics in banking and the industrial sector suggests that the results of this study will be broadly relevant to the industrial sector.