The HM test is a two-step procedure:
- The calculation of the shift in demand caused by an increase in price
- The effects of the demand shift on the profit situation. Depending on the amount of the profit margin (defined as the difference between revenues and variable costs) the results can differ.
To implement the HM test, modern findings in market research provide a broad instrument in the form of conjoint-analyses. When asking consumers if they would accept price increases, normally everybody would expect the answer to be "no". Instead of this, the conjoint-analysis examines the different product features and the resulting attractiveness to the surveyed consumers.
In the 80s and 90s conjoint-analyses developed into one of the most popular marketing tools used for the determination of features and prices of new products. A conjoint-analysis allows the scientifically sophisticated calculation of consumers maximum willingness to pay for a product that is characterised by different features.
The method is based on the assumption that consumer choice depends on utility evaluations. Normally, consumers are not able to articulate these preferences. Nevertheless, the choice between different concepts of products that are defined by variations in characteristics allow specialist to draw conclusions.
The basic idea is that the consumer faces different product features. The product features are decided upon based on personal preferences and used to determine the relevance of some product features. The word “conjoint” means that the relative utilities of specific product features are not quantifiable if the features are considered one after another. Only a joint examination enables a quantification. The consumer preferences and their intensity are the main definitions that are used for the quantification. In doing the conjoint-analysis, the partial utility of each product feature will be calculated, whereby the sum determines the total utility. As a result, the utility function and the cost function can be defined and used to calculate the price-demand function.
Within the framework of the HM Test, a conjoint-analysis is carried out as follows: On the basis of the products or services in question, a questionnaire is developed, while attributes and interviewees are selected. The realisation of the HM Test is possible in the form of a paper & pencil conjoint study or a computer-based conjoint-analysis. In practice, a computer-based conjoint-analysis is preferred. The establishment of the survey and the analysis of the results needs three to four weeks. This includes the computer-based interview in the form of a personal or telephone interview.
The conjoint-analysis results in a price-demand function that can be used to examine the effects of hypothetical price changes on demand.
Applying conjoint-analyses to perform the hypothetical monopolist test is proven, since valid and verifiable statements of market definition are possible.