Cellophane fallacy meaning

In competition law practice, the cellophane fallacy describes the error of defining the relevant market by observing consumer switching at current prices when those prices are already above the competitive level. If the SSNIP (small but significant non-transitory increase in price) test is run from a monopoly or collusive price, customers may seem to switch to products that are not genuine demand-side substitutes at competitive prices. This can produce an overly broad market definition and understate market power in merger control, dominance assessments and abuse of dominance cases. The term is a descriptive economic expression (originating in US case law) rather than a concept defined in UK or Irish legislation, but it is recognised in UK and Irish competition analysis and guidance. To avoid the fallacy, practitioners and authorities seek evidence of the competitive price benchmark, including historical prices, costs and margins, bidding and switching data, internal documents, and cross-price elasticities near competitive conditions, alongside supply-side substitution and qualitative constraints. Usage and implications are broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland. Its practical significance is ensuring robust market definition and accurate assessment of market power by the CMA, CCPC and the courts.