Regulation of Price Increases

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