Anticipating a Price Freeze or How Not to Be Caught With Your Prices Down

This paper studies how and why announcing and maintaining a price freeze, such as implemented between 1971 and 1973, can backfire. The vehicle for this analysis is a monopolistic firm that is shown to reduce output and raise price in anticipation of a price freeze, depending on the length of the control period and the demand elasticity. Firms will additionally lower output during the freeze. In the limiting case of perfect competition, the effect of actual and expected controls is a decline in industry output. The results of the paper hold under certainty but also when the timing of controls is random