Small but significant and non-transitory increase in price

It is an alternative to ad hoc determination of the relevant market by arguments about product similarity.

The SSNIP test is crucial in competition law cases accusing abuse of dominance and in approving or blocking mergers.

[1] The original concept is believed to have been proposed first in 1959 by economist David Morris Adelman of the Aston University.

[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. government's monopolization case against IBM, and in a 1981 proceeding precipitated by Marathon Oil Company's effort 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.

The SSNIP test seeks to identify the smallest relevant market within which a hypothetical monopolist or cartel could impose a profitable significant increase in price.

The relevant market consists of a "catalogue" of goods and/or services which are considered substitutes by the customer.

The application of the SSNIP test involves interviewing consumers regarding buying decisions and determining whether a hypothetical monopolist or cartel could profit from a price increase of 5% for at least one year (assuming that "the terms of sale of all other products are held constant").

Therefore, another, larger, basket of products is proposed for a hypothetical monopolist to control and the SSNIP test is performed on that relevant market.

If the pre-merger elasticity of demand exceeds the critical elasticity, then the decline in sales arising from the price increase will be sufficiently large to render the price increase unprofitable and the products concerned do not constitute the relevant market.

In other words, it is designed to analyse whether that increase in price would be profitable or if, instead, it would just induce substitution, making it unprofitable.

In economic terms, what the SSNIP test does is to calculate the residual elasticity of demand of the firm.

As can be seen, such an increase in prices would induce a certain substitution for our hypothetical firm, in fact, 200 units less will be sold.

The problem arises from the fact that economic theory predicts that any profit-maximizing firm will set its prices at a level where demand for its product is elastic.

In other words, it may happen that using the SSNIP test one defines the relevant market too broadly, including products which are not substitutes.

This problem is known in the literature as the cellophane paradox after the celebrated DuPont case (U.S. v. E. I. du Pont[8]).

Instead, at the competitive level, consumers viewed cellophane as a unique relevant market (a small but significant increase in prices would not have them switching to goods like wax or the others).

In the case, the Supreme Court of the United States failed to recognise that a high own-price elasticity may mean that a firm is already exercising monopoly power.