Legal Definitions - hypothetical monopolist test

The hypothetical monopolist test is a method used to determine if a product market is properly defined before it can be determined whether a company has monopoly power in that market or has violated antitrust law. This test is used in the Horizontal Merger Guidelines.

The test asks whether a hypothetical monopolist can profitably impose a small but significant and non-transitory increase in price in the product market as defined. If the answer is yes, and the price increase would be profitable for the hypothetical monopolist, then the market is correctly defined. If the answer is no, then the relevant product market is defined too narrowly and must be expanded to include other goods and services.

For example, let's say there are two companies that produce soda: Company A and Company B. The hypothetical monopolist test would ask whether Company A could profitably impose a small but significant and non-transitory increase in price for soda. If the answer is yes, then the relevant product market is defined as soda. If the answer is no, then the relevant product market may need to be expanded to include other beverages, such as juice or water.

The hypothetical monopolist test is important because it helps to ensure that antitrust laws are being enforced properly. If a company has too much market power, it can harm competition and consumers by raising prices and reducing choices. By using the hypothetical monopolist test, regulators can determine whether a company has too much market power and take action to protect competition and consumers.