Small but signicant and non-transitory

increase in price
In competition law, before deciding whether companies 2 Measurement
have signicant market power which would justify government intervention, the test of small but signicant
and non-transitory increase in price (SSNIP) is used
to dene the relevant market in a consistent way. It is an
alternative to ad hoc determination of the relevant market
by arguments about product similarity.
The SSNIP test seeks to identify the smallest relevant
The SSNIP test is crucial in competition law cases ac- market within which a hypothetical monopolist or cartel
cusing abuse of dominance and in approving or blocking could impose a protable signicant increase in price.
mergers. Competition regulating authorities and other The relevant market consists of a catalogue of goods
actuators of anti-trust law intend to prevent market fail- and/or services which are considered substitutes by the
ure caused by cartel, oligopoly, monopoly, or other forms customer. Such a catalogue is considered worth monopolising if should only one single supplier provided
of market dominance.
it, that supplier could protably increase its price without
its customers turning away and choosing other goods and
services from other suppliers.

The application of the SSNIP test involves interviewing

consumers regarding buying decisions and determining
whether a hypothetical monopolist or cartel could prot
from a price increase of 5% for at least one year (assuming that the terms of sale of all other products are
held constant"). If sucient numbers of buyers are likely
to switch to alternative products and the lost sales would
make such price increase unprotable, then the hypothetical market should not be considered a relevant market for
the basis of litigation or regulation. Therefore another,
larger, basket of products is proposed for a hypothetical
monopolist to control and the SSNIP test is performed on
that relevant market.

History

In 1982 the U.S. Department of Justice Merger Guidelines introduced the SSNIP test as a new method for dening markets and for measuring market power directly. In
the EU it was used for the rst time in the Nestl/Perrier
case in 1992 and has been ocially recognized by the
European Commission in its Commissions Notice for
the Denition of the Relevant Market in 1997.[1]

The SSNIP test can be applied by estimating empirically

the critical elasticity of demand. In the case of linear demand information on rms price cost margins is sucient for the calculation. If the pre-merger elasticity of
demand exceeds the critical elasticity then the decline in
sales arising from the price increase will be suciently
large to render the price increase unprotable and the
products concerned do not constitute the relevant market.

The original concept is believed to have been proposed

rst in 1959 by economist David Morris Adelman of
the Aston University.[2] Several other individuals formulated, apparently independently, similar conceptual approaches during the 1970s.[3] The SSNIP approach was
implemented by F. M. Scherer in three antitrust cases: in
a 1972 Justice Department attempt to enjoin the merger
of Associated Brewing Co. and G. W. Heileman Co.,
in 1975 during hearings on the U.S. governments monopolization case against IBM, and in a 1981 proceeding precipitated by Marathon Oil Company's eort to
avert takeover by Mobil Oil Corporation.[4] Scherer also
proposed the basic concept underlying SSNIP along with
limitations posed by what has come to be known as the
cellophane fallacy in the second (1980) edition of his
industrial organization textbook.[5] Historical retrospectives suggest that early proponents were unaware of other
individuals conceptual proposals.

An alternative method for applying the SSNIP test where

demand elasticities cannot be estimated, involves estimating the critical loss. The critical loss is dened as
the maximum sales loss that could be sustained as a result of the price increase without making the price increase unprotable. Where the likely loss of sales to the
hypothetical monopolist (cartel) is less than the Critical
Loss, then a 5% price increase would be protable and
the market is dened.[6]
1

Example

The test consists of observing whether a small increase

in price (in the range of 5 to 10 percent) would provoke
a signicant number of consumers to switch to another
product (in fact, substitute product). In other words, it is
designed to analyse whether that increase in price would
be protable or if, instead, it would just induce substitution, making it unprotable.

EXAMPLE

increase in price nor the reduction in costs. Overall, the

rm would make less prots (4800 compared to 5000).
In other words, there are other substitute products that
should be included in the relevant market and the product
of the rm does not constitute by itself a separate relevant
market. The market formed by this only product is not
worth monopolising as an increase in prices would not
be protable. The investigation should continue by including new products which we may guess are substitutes
of the one under investigation.

In general, one uses databases from the rms which may

include data on variables such as costs, prices, revenue or
sales and over a suciently long period (generally over at 3.2
least two years).

Second phase

In economic terms, what the SSNIP test does is to calcu- We already know that the previous product is not by itself
late the residual elasticity of demand of the rm. That is, a relevant market because there do exist other substitute
how a change in prices by the rm aects its own demand. products. Lets suppose that the previous rm (A) tells us
that it considers as competitors the products of B and C.
In this case, in the second phase we should include these
3.1 First phase
products to our analysis and repeat the exercise.
As an example, lets suppose the following situation for a The situation can be described as follows:
rm:
Given that we want to know if products A, B and C constitute a relevant market, the exercise would consist in
supposing that an hypothetical monopolist X would con Price = 10
trol all three products. In that case, the monopolist would
Sales = 1000
make prots of:
(10 x 1000) - (5 x 1000) + (13 x 800) - (4 x 800) + (9 x
Variable cost per unit = 5
1100) - (4 x 1100) = 17700
In this case, the rm would make prots equal to 5000: Now suppose that monopolist X decides to increase the
price of product A, maintaining the price of B and C conPrice x Sales - Variable cost x Sales.
stant. Suppose that a 10 percent increase in the price of
Now suppose the rm decides to increase its price by a 10
A provokes the following situation:
percent, which would imply that the new price would be
11 (10 percent increase). Suppose that the new situation This means that the price increase of A would provoke
that 200 units less of A be sold and instead, 100 more
facing the rm is therefore:
units of B and C will be sold respectively. Given that
our hypothetical monopolist controls all three products,
Price = 11
its prots will be:
Sales = 800
(11 x 800) - (5 x 800) + (13 x 900) - (4 x 900) + (9 x
1200) - (4 x 1200) = 18900
Variable cost per unit = 5
As can be seen, the monopolist controlling A, B and C
In this case, the rm would make prots equal to 4800: would protably increase the price of A by 10 percent, in
other words, these three products do constitute a market
Price x Sales - Variable cost x Sales.
worth monopolising and therefore constitutes a relevant
As can be seen, such an increase in prices would induce market. This result is because X controls all three proda certain substitution for our hypothetical rm, in fact, ucts which are the only substitutes of A. Thus, X knows
200 units less will be sold. This may be so because some that even if its increase in price of A will generate some
consumers have started to buy a substitute product, the substitution, a signicant share of these consumers will
same consumers have bought a smaller quantity of the end up buying other products which he controls, thereproduct given its price increase or maybe because they fore overall, his prots will not be reduced but rather inhave stopped from buying that type of product.
creased.
If we want to know whether such price increase has been If we had found that such an increase would not have been
protable, we should solve the following equation:
protable, we should further include new products which
Prots = (Price x Sales) - (Variable cost per unit x Sales) we may imagine are substitutes in a third phase until we
= 4800.
arrive at a situation in which such an increase in price
In our example, the increase in price produces too much would have been protable, indicating that those products
consumer substitution which is not compensated by the do constitute a relevant market.

Limitations

Despite its widespread usage, the SSNIP test is not without problems. Specically:
In evaluating a merger of A and B, performing the
SSNIP test on As products will not necessarily
yield the same relevant market as applying the
SSNIP test on Bs products. (This presented a legal issue in the 2000 Bayer/Aventis Crop Science
merger.) So a competition authority investigating A
should only consider competitive pressure (or lack
thereof) that B puts on A - reverse pressure from A
to B is irrelevant.

Du Pont (a cellophane producer) argued that cellophane

was not a separate relevant market since it competed with
exible packaging materials such as aluminum foil, wax
paper and polyethylene. The problem was that Du Pont,
being the sole producer of cellophane, had set prices at
the monopoly level, and it was at this level that consumers
viewed those other products as substitutes. Instead, at
the competitive level, consumers viewed cellophane as a
unique relevant market (a small but signicant increase in
prices would not have them switching to goods like wax
or the others). In the case, the US Supreme Court failed
to recognise that a high own-price elasticity may mean
that a rm is already exercising monopoly power.[8]

The SSNIP test relies on total losses in sales after a 5% price increase, not just substitutions to
a particular competitors product. Thus it includes sales losses due to outpricing by competitor
1, a more attractive deal by competitor 2, or to customers saving their money instead of spending it on
any of those competitors products. Mathematically
speaking, what is important is the own-price elasticity of the good in question, not its cross-price elasticity relative to any other product. Cross-price elasticities can help determine what products are substitutes (high, positive cross-price elasticities) in succeeding iterations of the SSNIP test, but the attractiveness of controlling a market can only be evaluated with an own-price elasticity.

5 See also

In succeeding iterations of larger market control, the

hypothetical price increase still only applies to the
rst product. The gains to the hypothetical owner of
substitute products come from increasing the price
of one base product and thus getting higher revenue
from it and spillover from its competitors - not from
increasing the price of the base product and the price
for its competitors.

6 References

The SSNIP test only measures competition based on

price and thus cannot be considered a catch-all or
fully sucient tool for dening markets.[7]
Furthermore, many economists have noted an important
pitfall in the use of demand elasticities when inferring
both the market power and the relevant market. The
problem arises from the fact that economic theory predicts that any prot-maximizing rm will set its prices at
a level where demand for its product is elastic. Therefore,
when a monopolist sets its prices at a monopoly level it
may happen that two products appear to be close substitutes whereas at competitive prices they are not. In other
words, it may happen that using the SSNIP test one denes the relevant market too broadly, including products
which are not substitutes.
This problem is known in the literature as the Cellophane
Fallacy after the celebrated Du Pont case. In this case,

Competition law
Federal Trade Commission
Local Loop Unbundling
Monopoly
European Commission
United States Department of Justice Antitrust Division
Relevant market

[1] See Crai International discussion on the issue .

[2] See M. A. Adelman, Economic Aspects of the Bethlehem Opinion, Virginia Law Review, vol. 45 (1959), p.
686.
[3] See Gregory Werden, The 1982 Merger Guidelines and
the Ascent of the Hypothetical Monopolist Paradigm,
Antitrust Law Review, vol. 71 (2003), pp. 253-269.
[4] See F. M. Scherer, On the Paternity of a Market Delineation Approach, working paper, American Antitrust
Institute web site, January 2009.
[5] F. M. Scherer, Industrial Market Structure and Economic
Performance (1980), p. 517.
[6] The SSNIP Test.
[7] The SSNIP test: some common misconceptions
[8] Market Denition and Market Power in Competition
Analysis.

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