Competition Law Reading Room
Market definition and substitution options
Rhonda L Smith
(2014) 22(2) Competition and Consumer Law Journal 105
This article considers how market definition can be affected when a firm’s substantial market power influences the substitution options available to consumers. This is often equated to the cellophane fallacy where the use of monopoly power creates the false impression of numerous close substitutes for the original product. However, substitution options can be altered in other ways when a firm possesses substantial market power as illustrated by the recent decision in Cement Australia (Flyash). Firms with substantial buyer power may force the price they pay for inputs below the competitive level thereby reducing the incentive for buyers to seek out substitutes, creating a reverse cellophane fallacy. These issues suggest that it may be necessary to know in advance of undertaking the market definition whether the firm possesses substantial market power and the influence of market power in substitution options may taint the evidence of substitution.
Not freely available online