Austrian-style gasoline price regulation: How it may backfire

In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that in face of the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.