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 specialise to succeed. This specialisation 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:
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.
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.
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.
How to trade fragmented markets
Fragmented markets can offer trading opportunities, particularly in watching for new entrants that may be set to deliver growth. To start trading fragmented markets today, follow these steps:
- Open your City Index account and add some funds
- Use our market screener to find 1000s of stocks to trade
- Choose to go long or short and set your position size
- Execute your trade
Or you can trade with zero risk using a City Index demo account. These are completely free and come with virtual funds so you can try out trading on live prices.