What is a fragmented market?

Feature image of stock market figures and indices
A headshot of Patrick Foot, financial writer for FOREX.com and CityIndex
By :  ,  Senior Financial Writer

A fragmented market is a sector that has no single clear leader – instead, lots of players fight out for supremacy. Learn all about fragmented markets, and whether they present trading opportunities, here.

What is market fragmentation?

Market fragmentation is a situation in which a marketplace is home to lots of diverse groups of consumers, each demanding a unique product that caters to their specific needs. When market fragmentation arises, no single product can dominate.

The process of market fragmentation means that companies must specialize to succeed. This specialization makes it very hard for one business to leave the others behind, which can lead to a fragmented market.

Restaurants and takeaways, for example, are often cited as classic examples of fragmented marketplaces. Consumers won’t all flock to a single restaurant or takeaway en masse, instead choosing an option based on cuisine, price, location, and more. In these circumstances, it becomes very difficult for one business to surge ahead of the others, keeping the market fragmented. 

Pros and cons of fragmentation

Fragmentation might sound like a bad thing, but these markets come with some unique advantages. Chiefly, the lack of a clear leader means that new entrants can find a quick path to profitability. This can be good news for investors and traders too, as smaller, cheaper stocks have a better chance of succeeding.

However, there are downsides to fragmentation too. While it may be easy to enter the market, establishing a dominant position, as we’ve seen, is extremely difficult. This can put a ceiling on the growth companies can achieve.

Fragmented market vs concentrated market

A concentrated market is the opposite of a fragmented market. Here, the landscape is dominated by one or two major players, which makes it very difficult for new companies to attract customers.

Consumers in a concentrated market tend to have very similar needs, which means it is easy to cater to them with a single product line. Utilities providers, for example, don’t need diverse sets of products to attract lots of new customers.

Concentrated markets are often measured using the concentration ratio (CR), which tells you how many participants are dominating a particular sector. A CR of three, for instance, means that just three companies have control over a given market. A CR of one means that a single business has a monopoly.

Unlike fragmented markets, concentrated markets are seen as highly uncompetitive. A few players have huge market share, which can discourage innovation and lead to high prices.

Defining a fragmented market

There’s no strict definition of a fragmented market. However, there are a few conditions that usually tell you whether you’ve found one:

  1. Low barriers to entry

As we’ve covered, the main positive of a fragmented market is that new entrants can easily make their own niche and start operating profitably. So, if you’ve spotted a sector where new companies seem to pop up all the time, there’s a strong chance that you’ve found a market that’s fragmented.

  1. Strong innovation

With lots of players and high competition, segmented industries are often a hotbed of innovation. Software, for example, is often fragmented – with lots of new companies breaking the status quo, preventing established businesses from taking control – and tends to see lots of new breakthroughs.

  1. Lack of scale

One of the drawbacks of catering to a fragmented customer base is the difficulty in taking advantage of economies of scale. With lots of diverse sets of consumers leading to lots of diverse sets of products, taking advantage of such efficiencies is difficult.

Related tags: Insights Stocks

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