2.1.3. Defining relevant markets in practice: the hypothetical monopolist test

Many competition authorities all over the world use the hypothetical monopolist-test in order to assess demand substitutability, which has also been coined the “SSNIPtest”. SSNIP is an acronym standing for “small but significant non-transitory increases in price”. It has been used by antitrust agencies in Australia, Canada, New Zealand, Great Britain and the U.S. In its Notice on the definition of the relevant market for the purposes of Community competition law (97/C 372/03), the Commission explicitly mentions the SSNIP test as a tool for delineating relevant markets.

The test is very simple: it is argued that a group of products offered in a specific area can only be considered a market if a hypothetical monopolist could increase its profits by raising his price significantly, usually 5 or 10 per cent. In other words, one tries to predict the effects of a “SSNIP” on the firm considering such a price increase. If many consumers switch to other suppliers, the SSNIP would not be profitable. This is taken as an indicator that (demand) substitutability is high and that the product market needs to be delineated more broadly. The product market is therefore broadened step-by-step by incorporating those products the consumers would switch to. Then, the test is repeated until a SSNIP would be profitable. The test is used to delineate markets in both their product and geographic dimension. The economic rationale underlying the test is based on a well-known tool of microeconomics, namely the (own) price elasticity and the cross-price elasticity. In general, elasticity is defined as a percentage change of a dependent variable as a consequence of a change of the independent variable, also stated as a percentage change. The price elasticity would thus inform us how the demand of a good changes given that its price increases (decreases) one per cent; or, in the case of the SSNIP changes five or ten per cent. The cross-price elasticity informs us how the demand in good y increases as a consequence of an increase in the price of good x.