Market Share – Understanding Competitive Advantage Through Market Power by Michael J. Mauboussin & Dan Callahan, CFA
Counterpoint Global Insights
There is no more important proposition in economic theory than that, under competition, the rate of return on investment tends toward equality in all industries.
Investors often treat analysis of competitive advantage and valuation as separate tasks. But they should be done together.
“It is important to establish that the economic forces governing industry attractiveness…influence prices, quantities sold, costs, investments, and the riskiness of the industry. These variables, in turn, are the building blocks for the value driver determinants of shareholder value.” – Alfred Rappaport, Creating Shareholder Value
A study of market share is useful because it can provide insight into entry and exit dynamics and industry stability. How a firm gains or loses market share can shed light on the distinction between more traditional markets, where multiple competitors grapple for share, and those with strong network effects, which often culminate in one firm dominating the industry.
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