Price cap
Also called: price ceiling
A price cap is a predetermined maximum price.
One place where price caps are used is an ad auction such as Google Ads. There, the price an advertiser pays for displaying or clicking on his ad is in fact dynamically determined. Among other things, supply and demand play a role here. The advertiser can specify the maximum price he is willing to pay by means of a price cap. The highest exposure then goes to the highest bidding advertiser, at a price slightly higher than the second highest bid.
Price regulation
Price caps can also be instituted by the government. In this form of market regulation, certain products or services are subject to a maximum price. Such a price cap can be set, for example, to combat inflation.
In certain industries, such as telecommunications and public transportation, tariffs are regulated to prevent a customer from overpaying for a particular service. Usury can thus be combated. Price regulation is widely used in sectors where privatized state-owned companies operate.
The government can also indirectly influence the cost of certain products and services. For example, by setting a maximum hourly rate for child care subsidies, over which an allowance can be paid.
Some manufacturers and suppliers go beyond stating recommended prices. They impose a maximum or minimum price on their customers as a condition of delivery. In many cases, such practices are prohibited because they go against the principle of a free market.
