A Critical Inquiry into the Hypothetical Monopolist Test

The Department of Justice and the Federal Trade Commission have adopted the Joint Merger Guidelines for evaluating horizontal mergers. These guidelines are intended to identify the techniques the agencies use to evaluate the potential anticompetitive effects of a merger. The Hypothetical Monopolist Test (HMT) is defined within the Guidelines. In this paper, the accuracy of the HMT is examined. In applying the test, two separate models are considered. In each model, the true extent of the product market is known. First, the HMT is applied in a linear differentiated demand model with n firms each producing one symmetrically differentiated product. Applying the HMT, conditions are derived whereby m products would be considered to comprise a product market. The test consistently underestimates the number of products in the relevant market in this setting. The second model utilizes a quasi-linear utility specification, where the products enter the utility function additively. The only interaction between the two products occurs through the income effects of the budget constraint. Under certain conditions, the smallest possible product market as defined by the HMT must include at least one producer of the other product. Therefore, depending on the underlying parameters of the utility function, the HMT may either over or underestimate the size of the relevant product market. This shortcoming calls into question the usefulness of the HMT in the analysis of mergers and other antitrust cases.