Five years ago, the hair dryer produced by the Wilson Appliance Company accounted for 50 percent of all sales of hair...

on December 5 at 02:29AM

not d but a

Im still confused. I dont get market shares jargon.

2 Replies

Ben on December 5 at 07:13PM

Hi ca_teran1, thanks for the question!

Answer choice D is a sneaky answer, so don't be too concerned if you picked that. However, let's see how we can avoid that in the future.

Questions concerning market share have remarkably similar flaws. In order to better spot them, we need to establish a few ideas. Market share is always out of 100%, meaning that the entire market no matter how big or how small must equal to 100%.

It is for this reason that simply telling us the market share of a company tells us absolutely nothing about the earnings of that company.

E.g. Company A vs Company B
Company A owns 100% of the paper market in Scranton
Company B owns 15% of the paper market in North America

Based off of these percentages alone, they will provide us with answer choices that lure us into thinking that the Scranton paper company sells more than the continental paper company. This may seem obvious because we know that Scranton is just one city and North America is an entire continent.

But the same would apply if they said 100% of fictitious country A, and 15% of fictitious country B. We need to know the total size of the market to draw any conclusions about what those market shares actually mean.

Conversely, telling us the total earnings of a company tells us nothing about the market share that it has. Going back to the previous example:

Company A from Scranton makes $2,000,000 per year in revenue.
Company B for North America makes $250,000,000 per year in revenue.

There is no way from these revenue figures that we can determine their market share.

Ben on December 5 at 07:18PM

Now let's get back to the specific question.

The argument says that five years ago this company had a 50% market share, and now it has a 25% market share. No increase in net income per sale. They then conclude that the net income must have been halved (because the market share is halved).

But they failed to account for the possibility that the market boomed 10x what it used to be five years ago. And now, 25% of a 10x bigger market results in much greater net income than 50% of a smaller market. They made the flaw of conflating market share with earnings.

Answer choice D tries to take advantage of an assumption many of us might make. That maybe the company sells the products for more and makes up the income in this way. But the stimulus clearly did take this into account by saying that there was no increase in net income per sale. So, it doesn't matter how much the product sells for at retail.

I hope this helps. Please let me know if you have any further questions.