Market Definition and Substitution Options

Abstract

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 f..