Can the HM-test be brought to an end?

Abstract

A significant change seen in the new regulatory framework for communications markets regards issues of market delineation. Relevant markets according to the new regulatory framework should be defined in accordance with competition law methodology/principles, most notably the so-called Hypothetical Monopolist Test (HM-test). Our discussion points to the conceptual and practical difficulties associated with evaluating the effects of a 5---10% price increase on the costs and therefore on the profitability of a hypothetical monopolist. Applying our analysis to fixed retail voice telephony markets we show that, in the presence of scale economies, final results crucially depend on assumptions about the cost function, in particular the relation of variable to fixed costs and the resulting (competitive) margin. The latter, in turn, will depend on the time horizon that is deemed to be relevant for market delineation purposes. Overall quantitative techniques applied to carry out the HM-test rigorously on empirical grounds are highly sensible to those assumptions a priori even if one assumes that (empirical) estimates of elasticities can be derived reasonably.