What is a price cap?

A price cap is simply a process for establishing rates or prices that will be charged for a particular good or service. In some instances, there are governmental organizations that determine price regulation. One example is in the rates that may be charged for household utilities, such as water and electricity.

What are the costs of price-cap regulation?

There can be additional costs for companies as they aim to maintain compliance with price-cap regulation policies. This can include putting time and management resources toward ensuring that the rates and prices applied by the company fall within the designated range.

What is the difference between indexed rate and capped rate?

An indexed rate is based on the lowest rate creditors are willing to offer. The spread or margin is based on a borrower’s credit profile and determined by the underwriter. If a product has a capped rate, then the interest rate will rise with increases in the indexed rate until it reaches a specified cap.

When did price caps start?

The United States followed by introducing price caps in the telecom sector in 1989. Price-cap regulations were designed to create an incentive-based regulation, which granted a portion of profits to be shared with the local telephone and long-distance carriers.