Market share, concentration and divesification in firm profitability

This paper provides a review of the role of market share, concentration and diversification in firm performance. An empirical analysis of the profitability of 722 large Australian firms for the period 1993 to 1996 is also undertaken. Using simple regression techniques the analysis suggests that industry concentration (as proxied by the 4-firm concentration ratio) has a positive influence on profitability. The market share of a firm does not appear to have any significant linear association with profitability, however, a non-monotonic relationship is found to be significant. This suggests that as market share increases to around 30% (of a 3-digit ANZSIC industry) profitability declines. When market share increases above 30% profitability rises, although only 9 firms in our sample have market shares above 30%. The extent of diversification appears to have little influence on profitability although, when loss making firms are excluded from the analysis, more focused firms do appear to have higher profitability.