Demand, cost elasticities and pricing benchmarks in the hypothetical monopoly test: the consequences of a simple SSNIP

Abstract

The hypothetical monopoly test for market power is translated into an operational ‘formula’ involving cost and demand elasticities. The importance of the choice of the pricing benchmark is emphasized - and of why it is important to incorporate an assessment of cost structure when conducting such tests. Recent work in the EU and the UK (notably in Telecoms) has ignored cost structures when making assessments of market power. It is shown in this article that ignoring cost structure leads to bias in that market power will often be found when in fact none is present.