Market definition in practice

  • Hypothetical Monopolist Test: This examines whether hypothetical monopolist can profitably impose a small but significant and non-transitory increase in price (SSNIP) in the proposed market. If yes, then the market is defined but if no, then the market is too narrowly defined and its scope should be broadened to include close substitutes. Most jurisdictions determine “small but significant non transitory” to mean 5-10% for a year (this means that if the hypothetical monopolist could profitably raise prices by 5-10% for a year).

  • Example:

(Example 5) Products A and B are being tested as a candidate market. Each sells for $100, has an incremental cost of $60, and sells 1200 units. For every dollar increase in the price of Product A, for any given price of Product B, Product A loses twenty units of sales to products outside the candidate market and ten units of sales to Product B, and likewise for Product B. Under these conditions, economic analysis shows that a hypothetical profit-maximizing monopolist controlling Products A and B would raise both of their prices by ten percent, to $110. Therefore, Products A and B satisfy the hypothetical monopolist test using a five percent SSNIP, and indeed for any SSNIP size up to ten percent. This is true even though two-thirds of the sales lost by one product when it raises its price are diverted to products outside the relevant market. (Source: DOJ and FTC (2010), Horizontal Merger Guidelines)