Cellophane fallacy definition

What does Cellophane fallacy mean?

The term is a reference to a mistake that can be made when assessing market power and the substitutability of products. The relevant market is often determined in part by reference to economic modelling of consumer demand in response to price increases, i.e. observing whether consumers shift to a substitutable product. However, the cellophane fallacy is a warning that consumer demand may shift to a non-substitutable product because the price level is already considerably above competitive levels.

The cellophane fallacy warns competition authorities against over-reliance upon current price levels in the market where there might be an undertaking with considerable market power. Authorities should try to ensure that relevant market definitions are determined with reference to competitive price levels so that only substitutable products are actually included in the relevant market definition. The name of the term is taken from a US Supreme Court case in which it is commonly accepted this mistake was made by the Court: US v El Du Pont de Nemours & Co [1956] 351 US 377 involving cellophane products.

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Cellophane fallacy is referenced 1 in Halsbury's Laws of England

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