Price Cap

A legally established maximum price that is imposed on a product or service. Generally, this price is below the one that would otherwise be charged by the supplier (for example, a monopolist). A price cap (or ceiling) is placed on a product or service within a market with the goal of keeping the price low, presumably based on the notion that otherwise the price would be too high. However, if imposed on a product or service subject to a competitive market, a price ceiling is likely to create a shortage of, or excess demand for, that product or service. See price cap formula.