Price Caps in Multi-Price Markets

Abstract

Many consumer markets feature a multi-dimensional price. A policymaker – a legislator, a regulator or a court – concerned about the level of one price dimension may decide to cap this price. How will such a price cap affect other price dimensions? Will the overall effect be good or bad for consumers? For social welfare? Price caps can be beneficial when sellers set prices in response to consumer misperception. The scope for welfare-enhancing regulation depends on the type (and direction) of the underlying misperception, as well as on market structure.