How Do Markets Get to Stable Rule of Three, Rule of Four Shape?

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976. 

Assuming the rule holds for connectivity businesses, it is the structure we should eventually see in the global telecom business, which was, until the latter 1980s, not subject to the rules. Formal monopoly businesses--by definition--have no competition.

But if asked to predict the eventual structure of the industry, at least for the tier-one suppliers selling at retail to consumers and businesses, the rule of three and rule of four would have made sense. 

In my own work, I have found the rule of four more important than the rule of three, though both rules are related. The reason is that the rule of four essentially provided guidance about questions many had around 1995 when the U.S. fixed telecom market, for example, was being nearly fully deregulated, in terms of telecom competition. 

In addition to questions about “who” would enter the market, “what” they would do, “how” they would compete, “when” the market would stabilize and “why” some attack vectors would be tried, many contestants would have wondered about the level of eventual success. 

How well would attackers fare? What would be the eventual fate of the incumbents? 

Business strategy in competitive markets largely free of regulatory constraints and major entry barriers tend to evolve towards a specific and stable market structure including the “rule of three” and the “rule of four,” Henderson argued. 

The rule of three states that a stable market is led by three firms. The rule of four refers to the expected market share in a stable market, where leader market share is twice that of provider number two, and where the number-two supplier has share double that of the number-three provider. 

That creates a stable market share structure of 4:2:1. It arguably is stable because there is little incentive for either number one or number two to disrupt the market by attacking to gain share. 

The number two supplier--with half the share and revenue of the leader--never has the ability to beat the leader in a long price war. The leader, on the other hand, generally is the most profitable of the top-three firms and risks that level of profitability if it provokes a market share battle that reduces profit margins. 

The leader might also trigger antitrust action were it to become significantly bigger. 

There are both strategy and tactical implications flowing from the rule of three and rule of four. 

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If telecom deregulation produced large numbers of new competitors, a contestant shakeout would be nearly inevitable. Surviving firms would need to produce revenue and customer growth rates above market averages, as the number of suppliers shrinks. 

The eventual losers would have increasingly large negative cash flows if they try to grow at all. Think about the experience of most competitive local exchange careers in the immediate aftermath of the Telecom Act of 1996 deregulation, the upstart digital subscriber line specialists of the same era, the legacy long distance providers, the bandwidth barons of international capacity, the fate of most independent mobile service providers from the earlier days of the mobile business or most independent cable TV providers. 

In all those cases, growth proved too difficult--in large part--because it was too capital intensive for firms that were not making profits. Sustainable profitability would be difficult for any firms aside from the leading and number-two firms. 

In competitive markets, share less than 30 percent of the relevant market--or at least half the share of the leader--would prove highly risky and likely unsustainable. 

In most deregulating markets, and especially when technology enables new ways to create and deliver products, at different price points and production costs, moats or defensive boundaries separating industries and roles become porous. It no longer is so easy to determine “who are our competitors?” 

The change in retail prices matters. Prices tend to fall in deregulating markets, and especially in those segments of the market where demand shifts rapidly. Voice, messaging and bandwidth costs are prime examples. 

Though arguably not the case in competitive telecom environments, if prices do not change,   competitor willingness to invest at rates higher than the sum of both physical market growth and the inflation rate will shift market share. That arguably has not been the case in the competitive telecom markets, as prices have continually fallen. 

Over-investment then becomes a hazard. If everyone is willing to invest at rates higher than revenue growth, then prices and margins will be forced down by overcapacity until firms stop investing.

In a competitive market, the low-cost provider tends to win. But if the low-cost leader holds prices too high, that provider will lose market share until the firm is no longer the market share leader. In markets where the top two providers have nearly the same share, all the other contestants tend to lose share over time. 

When the two top providers instead maintain higher prices, they both lose share to the other competitors. Market leaders can protect price at the risk of losing share. Paradoxically, when leaders cut prices, they hasten their dominance by creating the rule of three and rule of four market structures. 

The faster the industry growth, the faster consolidation occurs.

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Still, few mobile markets have the stable 4:2:1 market structure. Until recently, many observers would have argued that the U.S. mobile market was a structural duopoly. It is possible that will change in the wake of the T-Mobile merger with Sprint.

Stable, Competitive Markets Have a 4:2:1 Structure

Bruce Henderson, founder of the Boston Consulting Group is credited with a couple of foundational ideas about business, including the notion of the experience curve, which explains how the cost of products decreases with volume.

“Costs characteristically decline by 20 percent to 30 percent in real terms each time accumulated experience doubles," Henderson posited in 1968.

Among the ideas some may deem most important relates to market structure under conditions of competition.

"A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

There are important implications. We may decry “bigness.” We may prefer that a plethora of firms exist. But the rule of three suggests a robustly competitive market will, over time, assume a stable form where three firms dominate, with market shares have a specific structure.

To wit, the leader will have market share double that of company number two, while company number two has twice the market share of the third firm. Empirical studies tend to confirm the pattern.

In most markets, argue Bain consultants, two firms have 80 percent of the profit. In other words, market share also often is a proxy for profitability. “On average, 80 percent of the economic profit pool was concentrated in the hands of just one or two players in each market,” say Bain and Company consultants. In other words, it really matters if a firm is number three in any market.

That virtually perfectly corresponds to a market share pattern of 4:2:1, as the number-three provider tends to have less than 10 percent share, in that pattern.  

One sees this pattern in some telecom markets. Looking at market share and return on invested capital for the three largest telecom providers in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.

The real-world structure does not precisely match the rule of three prediction, of course, with Thailand having the almost-perfect correspondence between predicted results and actual results.

In many other markets, two observations are apt: where the 4:2:1 pattern does not exist, markets either are not competitive, or not stable, or both. And though we might be tempted to think such patterns exist mostly for capital-intensive industries, the pattern seems to hold in most industries.  

Source: Reperio Capital

My rule of thumb incorporating the “rule of three” is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, China and Indonesia, the general pattern holds.

In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.

Applying the rule of three in consumer telecom markets is complicated, however, since the “markets” include segments such as video entertainment, internet access, voice and mobility where specific players have distinct market share profiles.

The broad conclusion is that telecom markets are not yet stable.  

Myanmar to Test "Rule of Three"

That mobile and fixed network communications industries structurally are oligopolies might irritate many, but has proven to be an enduring foundation of communications industry dynamics globally, since the great wave of privatizations and competition began in the 1980s.

Some might argue that stable oligopolies are possible somewhere between two and four providers, with many arguing three strong contestants is the optimal sustainable outcome. That four or more providers exist in many markets is considered by many a “problem” in that regard, generally called the rule of three.

Most big markets eventually take a rather stable shape where a few firms at the top are difficult to dislodge.

Some call that the rule of three or four. Others think telecom markets could be stable, long term, with just three leading providers. The reasons are very simple.

In most cases, an industry structure becomes stable when three firms dominate a market, and when the market share pattern reaches a ratio of approximately 4:2:1.

A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest, according to the rule of three.

In other words, the market share of each contestant is half that of the next-largest provider, according to Bruce Henderson, founder of the Boston Consulting Group (BCG).

Those ratios also have been seen in a wide variety of industries tracked by the Marketing Science Institute and Profit Impact of Market Strategies (PIMS) database.

Myanmar aims to test the thesis.

Myanmar has formally invited proposals from local public companies to create a fourth mobile operator, in partnership with a foreign company. Myanmar also is planning to auction off additional spectrum.

The Rule of Three applies wherever competitive market forces are allowed to determine market structure with only minor regulatory and technological impediments. But there are some circumstances where market structure does not take that stable “rule of three” shape.

Regulatory policies hinder market consolidation or allow for the existence of “natural” monopolies.

Also, in some cases, major barriers to trade and foreign ownership of assets can have the same effect.

We shall see what happens, long term, in Myanmar. In other instances, four has proven to create an  unstable market. But instability can last for long periods of time, so the outcome cannot be predicted, yet.

In July 2015, Telenor had grown its subscribers to more than 10 million, while Ooredoo reported  3.3 million at the end of April, 2015.

Myanmar also is allocate more sub-1-GHz spectrum in the 700 MHz, 850 MHz, and 900 MHz bands.

As you would guess, as mobile adoption--especially of smartphones--grows, new demand will be created for subsea bandwidth to Myanmar.

As of the end of the first quarter of this year, mobile penetration in Myanmar stood at 25 percent,  up from less than 19 percent at the end of 2014.  

In a significant development, half of people buying a mobile phone buy a data plan, while 70 percent of all the phones sold are smartphones.

Myanmar  has about 30 Gbps of international bandwidth, with Telenor and Ooredo adding another 10 Gbps, and another order of magnitude to come over several years.

There are currently 3,000 mobile towers, but the country needs 15,000 to 20,000, and 25,000 km more transport facilities.

Rule of Three in Kenya Mobile

Stable industries tend to have a market share pattern, as noted by Bruce Henderson, founder of the Boston Consulting Group. "A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

The mobile services market in Kenya illustrates that pattern, where Safaricom, the market leader, has more than twice the share of the number-two provider Airtel, which in turn has twice the share of the number-three provider Telekom Kenya. That same pattern tends to hold for profit margins as well.  

source: Communications Authority of Kenya 

One sees this pattern in some telecom markets. Looking at market share and return on invested capital for the three largest telecom providers in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.

The real-world structure does not precisely match the rule of three predictions, of course, with Thailand having the almost-perfect correspondence between predicted results and actual results, according to a 2016 analysis by Reperio Capital. 

In many other markets, two observations are apt: where the 4:2:1 pattern does not exist, markets either are not competitive, or not stable, or both. And though we might be tempted to think such patterns exist mostly for capital-intensive industries, the pattern seems to hold in most industries.  

Source: Reperio Capital

My rule of thumb incorporating the “rule of three” is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, the general pattern holds.China and Indonesia do not fit the stable pattern so well. 

In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.

If those markets are actually competitive, some further change in market share would be expected, with the market leader losing share, gained by a clear and stronger number two.

Anti-Trust Rarely Succeeds Permanently

Most mature markets feature a rule of three or a rule of four. “A stable competitive market never has more than three significant competitors,” BCG founder Bruce Henderson said in 1976. That often means the top-three providers have market share in the 70 percent to 90 percent range. 

The rule of four refers to the expected market share in a stable market, where leader market share is twice that of provider number two, and where the number-two supplier has double the share of the number-three provider. 

That creates a stable market share structure of 4:2:1. It arguably is stable because there is little incentive for either number one or number two to disrupt the market by attacking to gain share.

All of that explains the periodic waves of anti-trust action we see in many markets. Though there seems to be non-existent interest in anti-trust in the cloud computing “as a service” markets, some speculate it could eventually happen. 

The issue is that such regulatory action never lasts. Competitive markets will revert to the rule of three or rule of four structure again. Look at U.S. telecommunications, where a former monopoly by AT&T was ended in 1982, creating eight new contestants instead of one AT&T. 

What do we see some 40 years later? Essentially the rule of three. The rule of four is not yet in place, though. 

There also generally is a direct relationship between market share and profitability.  Some note there is a similar return on sales and market share relationship.

source: Marketing Science Institute

The point is that it is reasonable to expect that profits are directly related to market share, with a pattern where the leading three firms have something like a 40-20-10 share pattern, or perhaps 35-17-8 pattern.

Source: Reperio Capital

That pattern is--contrary to often-made claims--not a result of lack of competition, but instead evidence that competition exists. Competition means buyers gravitate to the perceived better products. That, in turn, leads to market share gains. 

At some point, it is in the self interest of contestants not to wage ruinous price wars. Such wars depress earnings and profit margins for all contestants, but rarely change the relative standings. The more-profitable leader can absorb the losses more easily than the less-profitable attackers in second or third place. 

Anti-trust action rarely, if ever, results in permanent change.

How Many U.S. Mobile Service Providers are Optimal?

With the recent mergers of T-Mobile USA and MetroPCS, and the purchase of Sprint by Softbank (assuming both transactions pass regulatory muster), there is once again an active discussion in many quarters about the future shape of the U.S. mobile service provider business.

What seems a safe observation, though, is that the number of successful mobile service providers will be few in number. The only question is “how few?” In many markets, there are four to five major providers, in terms of market share. But just how stable a market that is is questionable.

The Rule of Three holds nearly everywhere. While the percentage market share might vary, on an average, the top three mobile service providers control 93 percent of the market share in a given nation, irrespective of the regulatory framework.

Some might argue that scale effects account for the relatively small number of leading providers in many capital-intensive or consumer electronics businesses. At some point, the access business can have only so many facilities-based providers before most companies cannot get enough customers to make a profit.


Eventually, only the top three service providers control the majority of the market. There are niches that others occupy but they are largely irrelevant to the overall structure and functioning of the overall market.

Younger mobile markets can see five to six significant contestants at first, each with at least 10 percent market share. Over time, that winnows to three, history suggests. To be sure, there are plenty of markets where four to six major contestants operate, but even there, about three firms control most of the actual customer and market share.

The competitive equilibrium point in the mobile industry seems to when the market shares of the top three providers are 46 percent:29 percent and 18 percent, some might argue. At such a structure, the top three providers have 93 percent of the market.

That roughly corresponds with a rule of thumb some of us learned about stable markets. The rule is that the top provider has twice the market share of the contestant in second place, while the number-two provider has about twice the market share of the number-three provider.

That suggests the U.S. mobile market still has room to change. At the moment, Verizon Wireless has perhaps 34 percent share, while AT&T has about 32 percent share. Sprint has about 17 percent, while T-Mobile now has about 13 percent.

Classic theory would suggest the ultimate market share could approach a market with the top-three providers having a market share relationship something like 50:25:12.

Real markets always vary from “textbook” predictions, but a “rule of three” market structure seems likely.

That would have highly-significant implications for the four current U.S. providers that today represent 93 percent of all subscribers. One would presume the long-term viability of Sprint and T-Mobile USA is questionable.

Practical Implications of Pareto, Rule of Three, Winner Take All

Any market researcher, studying any particular market, will tend to find something like a Pareto distribution often applies: up to 80 percent of results are produced by 20 percent of actors. Some might call that the rule of three. 

Market share structures in computing, connectivity and software tend to be fairly similar: leadership by three firms, corresponding to the rule of three. 

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976.  

Codified as the rule of three, the observations explains the stable competitive market structure that develops over time, in many industries. 

Others might call this winner take all economics.  

Consider market shares and installed base in the U.S. home broadband market (including small business accounts). Of a possible total installed base of 122 million locations, 90 percent of the installed base is held by 15 companies. 

Just two firms have 52 percent of the installed base of accounts. 

Broadband Providers	Subscribers at end of 2022	Net Adds in 2022
Cable Companies
Comcast	32,151,000	250,000
Charter	30,433,000	344,000
Cox*	5,560,000	30,000
Altice	4,282,900	-103,300
Mediacom*	1,468,000	5,000
Cable One**	1,060,400	14,400
Breezeline**	693,781	-22,997
Total Top Cable	75,649,081	517,103
Wireline Phone Companies
AT&T	15,386,000	-118,000
Verizon	7,484,000	119,000
Lumen^	3,037,000	-253,000
Frontier	2,839,000	40,000
Windstream*	1,175,000	10,300
TDS	510,000	19,700
Consolidated	367,458	724
Total Top Wireline Phone	30,798,458	-181,276
Fixed Wireless Services
T-Mobile	2,646,000	2,000,000
Verizon	1,452,000	1,171,000
Total Top Fixed Wireless	4,098,000	3,171,000
Total Top Broadband	110,545,539	3,506,827
source: Leichtman Research Group

The point is that when tracking market developments, the big broad trends are discernible from understanding the actions, strategies and results of a mere handful of firms. And while the full range of “big company” strategies, opportunities and actions can vary substantially from those of perhaps hundreds to thousands of small firms, the trends that move the needle financially typically can be gleaned from following just a relative handful of firms. 

In other words, the business “laws of motion” are dictated by a relative handful of actors, even in markets with thousands of contestants. 

That might seem unimportant. For market analysts, it is a foundational assumption.