Cellophane paradox

The Cellophane paradox (also the Cellophane trap or Cellophane fallacy or gingerbread paradox) describes a type of incorrect reasoning used in market regulation methods.

The paradox is that a firm is seen not to have a monopoly because there are substitutes

for its product, but the only reason there are substitutes is because the firm's monopoly power allows it to set a price high enough that substitutes are marketable. In technical economic terms, such a product has low cross-price elasticity of demand. A well-known example of the paradox involves the cellophane product in the 1950s, a United States Supreme Court case and subsequent response in economic literature.

Cellophane was a flexible wrapping material made by Du Pont, U.S. production of which Du Pont restricted to itself in the early 1950s using numerous patents. Du Pont was sued under the Sherman Act for monopolization of the cellophane market by the U.S. Justice Department, and the case (U.S. v. E. I. du Pont) was decided by the Supreme Court in 1956. The Court found no monopoly, because there were many substitutes for cellophane and, therefore, du Pont had only a small share of the market for wrapping materials (i.e., it possessed little or no market power).

This reasoning was challenged by a 1955 article in the American Economic Review, noting that the only reason substitutes for cellophane were available was that Du Pont had exercised excessive market power to command a high price for cellophane. In research on the du Pont company arising from his PhD dissertation, Willard F. Mueller and co-author George W. Stocking, Sr.