How is relative market share computed?

Relative market share is computed by dividing the firm's absolute market share by that of its leading competitor. This metric provides insight into the firm's competitive position within the market by comparing its market share directly to the largest competitor’s share. The calculation helps assess how well a company performs in relation to its leading rival, which is essential for strategic decision-making and positioning in the marketplace.

Understanding relative market share is critical in competitive analysis, as it gives firms an idea of their strengths and weaknesses relative to others in the industry. A higher relative market share indicates a stronger competitive position, often leading to better bargaining power, greater economies of scale, and the ability to innovate more effectively.

The other methods mentioned do not accurately capture the competitive dynamics in the same way. For instance, adding market shares does not provide a meaningful comparison with competitors, while multiplying market shares does not yield informative insights into competitive positioning. Subtracting a firm's market share from the total market is also irrelevant as it does not represent the relationship to competitors, which is the primary focus when evaluating relative market share.