Econ folks refresh me, how is a price ceiling helpful for manufacturers?

[BrunoPuntzJones]

Don't price celings limit the price of a product? A floor price sets a bottom limit, which I can see protecting sellers. However, it seems like a price ceiling would be bad. They wouldn't be able to charge over X amount regardless of what costs are. It's been a while since I've had any Econ class, I know this is pretty basic

Having to do a case over Tootsie Roll, and the case says that a strength is a price ceiling on candy. Seems like that would work against them...Hep me out.

 

[manly]

I'm no expert in economics, but price ceilings have two problems.

First off, they can make producers complacent. Instead of competing to drive down the marginal cost and sale price of their product, they can maintain the status quo and simply charge around the price ceiling.

Secondly, and probably more seriously, producers that are able to cut the marginal cost of the product below the price ceiling now have an effective government mandate to charge at a higher price where they will reap extra profits.

 

[b0mbrman]

Effective price ceilings create excess demand...black markets sometimes develop.

Hmmm...maybe if Tootsie Roll's got a cheaper means of production than other companies, then an increase in price over the price ceiling would mean other companies can produce competing products which means more competition...

I have no idea at all

 

[b0mbrman]

<< First off, they can make producers complacent. Instead of competing to drive down the marginal cost and sale price of their product, they can maintain the status quo and simply charge around the price ceiling. >>


If there's competition, then they'll always be fighting to be perceived as the highest quality...it does keep the industry as a whole from trying to make a product of more utility to the consumer though as extra consumer surplus really does nothing for them...


<< Secondly, and probably more seriously, producers that are able to cut the marginal cost of the product below the price ceiling now have an effective government mandate to charge at a higher price where they will reap extra profits. >>


I don't see how this would happen...price ceilings set an upper limit, not a lower one...

 

[freebee]

The price ceiling on candy allows tootsie rolls to substitute candy for sugar in their products, as a price ceiling on candy would limit their selling price to a pre-determined limit. In the US, sugar has a floor price to subsidize domestic producers, making sugar expensive for many times of foods. As a result substitutes for sweetners are necessary.


...I have no idea if the above is true or not...but it kinda makes sense.

 

[b0mbrman]

<< The price ceiling on candy allows tootsie rolls to substitute candy for sugar in their products, as a price ceiling on candy would limit their selling price to a pre-determined limit. In the US, sugar has a floor price to subsidize domestic producers, making sugar expensive for many times of foods. As a result substitutes for sweetners are necessary.


...I have no idea if the above is true or not...but it kinda makes sense. >>


Wait...is this definition of "candy" different from the one I'm used to? The one where candy is a group of things that includes Tootsie Rolls?

If it is, then this guy is right...

 

[BrunoPuntzJones]

Sounds good to me freebee, I understand what you are getting at.

Candy=Confectionary sugar product, what you are thinking of b0mber

 

[HamSupLo]

A price ceiling would benefit manufacturers if the government introduces a subsidy to offset the lost caused by the shortage in supply.

 

[manly]

<<

<< First off, they can make producers complacent. Instead of competing to drive down the marginal cost and sale price of their product, they can maintain the status quo and simply charge around the price ceiling. >>


If there's competition, then they'll always be fighting to be perceived as the highest quality...it does keep the industry as a whole from trying to make a product of more utility to the consumer though as extra consumer surplus really does nothing for them... >>


There can be competition, but not on pricing. For a related example, look at automobile gas mileage in the U.S. The average mileage hasn't gone down in two decades, even though their were federal regulations for a minimum vehicle gas mileage. Basically, instead of the market deciding to promote fuel-efficient vehicles, the major manufacturers decided to operate within the law, but no better. Actually, it sounds like we're in agreement on this point.


<<

<< Secondly, and probably more seriously, producers that are able to cut the marginal cost of the product below the price ceiling now have an effective government mandate to charge at a higher price where they will reap extra profits. >>


I don't see how this would happen...price ceilings set an upper limit, not a lower one... >>

[/i] >>


I'm not sure this problem happens in all industries, but I believe it's evident in energy and the cable monopoly (and probably other utilities). Essentially, if the government mandates that you can sell product X for Y dollars, then markets w/o perfect competition can decide to not compete on price and undercut Y.

Again, I'm barely an armchair Economist.

 

[glenn1]

Artificial price limits (either upper or lower) can be either helpful or harmful to a particular company, depending on the industry, product, or company involved. Essentially, when you set price controls, you limit the ability of producers to segment the market. That can lead to various results.

Competitors in any given market space tend to try to segment the marketplace for a given category of goods several ways, the most common being by price (selling for cheaper than the closest substitute), or by differentiating the product itself (by attempting to establish it as a "premium" item, and thus being able to charge a higher price than a substitute). More on this later.

Bear in mind, the larger competitors tend to enjoy a natural advantage by way of economies of scale... per unit costs being lowered by increased production. That tends to work greatly in favor of the larger companies in commodity industries, such as gasoline. Consumers perceive (correctly) Texaco gasoline as being a perfect substitute for Exxon gasoline, and vice versa, so the strategy employed is to be the lowest cost producer and be able to undercut your competition.

Now, let's move to a semi-commoditized industry, such as the candy industry. It's somewhat commoditized, but not completely.... the consumer doesn't perceive a Tootsie Roll as being a perfect substitute for another type of candy, such as Godiva. A price ceiling eliminates the ability to create a "premium" brand name, thus the lower cost candy manufacturers such as Tootsie Rolls enjoy a natural advantage, as their production costs are considerably lower than Godiva. Additionally, it provides protection from new entrants to the marketplace as well. Also, since prices are capped on the upside, it provides a natural barrier to entry to the industry, again benefitting the highest producing, lowest-cost manufacturers in the industry.