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What is a price ceiling and how to find it

Learn how to set the proper price ceilings with SurveyMonkey. 

A price ceiling is one example of the government regulating the market prices of goods and services. Price ceilings come with pros and cons, which we will explore here. We'll also delve into their impacts and how to determine the appropriate price for your goods or services.

A price ceiling is the highest price a seller can charge for a product or service, according to Investopedia. Governments and other regulatory bodies impose price ceilings when they believe an item's supply and demand price is unfair. The government sets the price ceiling below the market price that consumers are willing to pay. This helps to control prices effectively.

A price ceiling is a type of price control that prevents sellers from charging more than the ceiling price. This ensures that the products or services are affordable for most consumers. This means that people can buy or continue using them without them being too costly.

The examples below illustrate price ceilings for a variety of products and services. Hopefully, these will enhance your understanding of how a price ceiling works in real-life situations.

Rent control

Let's say you reside in a New York City apartment complex, where rental prices can be sky-high. Your building, however, is subject to rent control, so your rental rate is limited. Rent control limits how much your landlord can charge for your apartment. It also restricts how much they can increase your rent each year; this is an example of a price ceiling. 

Bottled water

After Hurricane Sandy in 2012, New York and New Jersey put limits on how much stores could charge for bottled water. Authorities implemented the limits to prevent price gouging during the aftermath of the hurricane. They did this to protect consumers from overcharging for essential items. The price limits helped ensure that residents had access to necessary supplies at fair prices.

Food and fuel price caps

Some governments set maximum prices on necessities like food and fuel. This is done to ensure that people can afford these items. It also aims to prevent businesses from overcharging consumers.

Prescription medications and lab tests

The government can set prices for medications and tests to make sure everyone can afford them. The Inflation Reduction Act of 2022 in the US aims to lower prescription drug costs. This will be done by setting a limit on how much people have to pay out of their own pockets. The goal is to gradually decrease these expenses over the next few years.

Insurance reimbursement

Health insurance companies often have limits on how much they will pay doctors or reimburse patients for medical care. These maximum reimbursement rates could be considered price ceilings.

In addition to setting price ceilings, the government can set price floors. Price floors are the literal opposite of price ceilings. Let’s look at how they’re the same and how they’re different.

As we’ve covered, the price ceiling is the maximum amount a seller can charge for goods or services as set by a government or other regulatory body. 

A price floor, which is the opposite of a price ceiling, establishes a minimum purchase price for a product or service.

Setting a price floor can help an industry avoid producing surplus products. The price floor is typically set above the market equilibrium price. This can benefit producers, farmers, or factory owners by setting higher minimum prices.

Minimum wage laws are the best examples of price floors. The minimum wage sets the lowest legal amount that an employer can pay a worker so that the worker can afford a basic standard of living.

The following are the steps a government or regulatory body typically takes when setting a price ceiling:

  1. The government sets a maximum price for a popular product or service to make it cheaper than the market price.
    Price ceilings are typically imposed on consumer staples like food, gas, or medicine, especially after crisis events that may cause prices to increase dramatically on these items.
  2. The seller is required to sell a product or service at a price determined by the regulatory body. This price can either be the same as or less than the set amount.
  3. The government may also set a price floor in tandem with the price ceiling to keep prices competitive.
  4. The government regularly reviews the price ceiling to ensure it accurately reflects current supply and demand.
    If the market equilibrium price increases and demand exceeds supply, a shortage could result.
  5. The government changes the price ceiling as the demand changes.

While a price ceiling is helpful in the short term at stimulating demand, long-term use has ramifications.

A deadweight loss is the cost to society, which occurs when supply and demand are out of equilibrium. This leads to goods and services being either over or undersupplied to the market. With the resulting inaccurate pricing, there will be changes in consumer behavior that can negatively affect the economy.

If the price ceiling is too high, overvalued products may equal higher profits for a business but put consumers at a disadvantage in obtaining what they need. And if the ceiling is too low, undervalued products may become very desirable for consumers, but producers may be unable to meet production costs.

As an example, let’s look at a taco vendor. If the vendor makes 100 delicious tacos but only sells 75, they must discard the 25 that will go bad. That oversupply is their deadweight loss.

If that same taco vendor makes 100 delicious tacos, sells them all, and has 15 customers still waiting to buy tacos, this is another example of a deadweight loss because the customer is willing to make the purchase, but can’t due to a lack of supply of tacos.

There are advantages for both consumers and sellers when a price ceiling is enforced.

In the short term, price ceilings keep goods and services affordable for consumers. They prevent sellers from taking unfair advantage and charging exorbitant prices. If a temporary shortage is causing inflation, ceilings can keep prices within an affordable range for consumers until supply increases.

When prices are kept to an acceptable level, it encourages consumers to spend as they take advantage of lower prices. This is a positive sign for the overall economy.

Price gouging occurs when sellers take unfair advantage of consumers. This can happen during an emergency or disaster situation if a seller significantly increases the prices for essential goods or services. Price ceilings prevent sellers from raising prices to unreasonable levels and allow consumer access to necessary products.

Of course, along with the advantages of price ceilings, we may also experience disadvantages.

Price ceilings are placed below the equilibrium point where supply and demand meet so that the product or service is affordable for the consumer. Well, this affordability creates higher demand. Because of the ceiling, producers can’t always set prices high enough to supply products without experiencing a loss. If this happens, they either stop producing the products or go out of business. This results in a shortage of those goods or services. Using our taco example from earlier, let’s say the price of flour escalated quickly. The vendor may not be able to afford to create tacos and stay under the price ceiling.

If lower prices don’t result in a shortage, it may be because businesses are cutting costs so they can make a profit at the lower price point. Cutting costs can mean cheaper materials, unreliable products, or poor quality. If our taco vendor cuts corners, he may buy inferior-quality cheese or meat. These cost-cutting measures will affect the taste and quality of his tacos, and they will no longer be as desirable to the public.

When price ceilings create excess demand, consumers want products but cannot purchase them. If legal suppliers can’t meet the demand, consumers may buy the products they want at a higher price than the price ceiling allows from illegal sellers. Returning to our tacos, this means consumers can still get their delicious tacos, but only if they are willing to pay an inflated price.

So, let’s say your business produces goods that are affected by a price ceiling. How do you set your prices? Momentive, the maker of SurveyMonkey, has an answer.

The Van Westendorp Price Sensitivity research method was introduced in 1976 by Dutch economist Peter Van Westendorp to determine consumer price preferences. Van Westendorp analysis is used widely in market research to determine the price points for products and services.

Conducted through a survey, respondents are asked a series of questions to determine what value they place on a product or service.

The questions vary, but typically read something like this:

  1. At what price would you consider this product to be too expensive, so you wouldn’t consider buying it?
  2. At what price would you consider this product to be priced too low, so you’d suspect the quality must be low?
  3. At what price would you consider this product to be expensive, but not prohibitively so—but you’d have to consider carefully before buying it?
  4. At what price would you consider this product to be a great value for the money?

These questions basically ask what is too expensive, too inexpensive, and a good value for the product or service in question. The answers are plotted on a graph to identify the indifference price point (the intersection of expensive and cheap) and the optimal price point (the intersection of the “too cheap” and “too expensive” lines).

With this information, you can make an informed decision about what consumers are willing to pay for your product or service within the price ceiling, if applicable.

SurveyMonkey offers a price optimization solution that may be used to identify the optimal price point and price range for a product or service with direct input from your target market. The experts at SurveyMonkey will help you obtain high-quality data through a skillfully designed study using the Van Westendorp Price Sensitivity solution. 

TIP: Need help creating a price testing survey? You can use the price testing survey template by SurveyMonkey to get started. 

It can be difficult to find the optimal price for your products and services, especially if you’re operating in an environment with a price ceiling. Price ceilings and floors can be both helpful and harmful, depending on the situation. So, price your product with confidence using the Momentive Price Optimization Tool.

As always, SurveyMonkey is here to provide you with amazing market research services. Our market research solutions can help you with everything from monitoring your industry trends to consumer segmentation to branding. Get started with us today!

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