Regulation of Price Increases

29 Pages Posted: 13 Dec 2016  

David B. Ridley

Duke University - Fuqua School of Business

Su Zhang

Duke University, Graduate School, Students

Multiple version iconThere are 2 versions of this paper

Date Written: August 22, 2016

Abstract

U.S. federal and state governments rarely regulate healthcare price levels, but do regulate price changes for pharmaceuticals, hospitals, and health insurance. Previous research showed that limiting price increases can raise launch prices and reduce both profit and social welfare, assuming consumers are myopic. We show that with forward-looking consumers, limiting price increases can have the opposite effect, that is, launch prices fall while profit and social welfare rise. Ironically, inflation regulation can cause inflation to rise, but only because firms are reducing launch prices to make the regulation bind and credibly commit to future prices.

Keywords: Price Cap, Healthcare, In Ation, Regulation

JEL Classification: D4, I1, L5

Suggested Citation

Ridley, David B. and Zhang, Su, Regulation of Price Increases (August 22, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 240. Available at SSRN: https://ssrn.com/abstract=2884197

David B. Ridley (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Su Zhang

Duke University, Graduate School, Students ( email )

Durham, NC
United States

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