Price-Cap Regulation:

Price cap regulation is designed to protect the consumer from excessive price increase by producers. At the same it provides an incentive for firms to reduce costs of production. Price cap regulation is widely prevalent across countries, both developed and developing.

The price cap regulation is also called 'RPI-X regulation'. It allows the firm to increase its price level according to the rate of inflation. The regulator takes an index which represents an inflation measure (in symbol I) and productivity offset (X). The regulator usually fixes the price of the goods or services by constructing an index (I-X). The price index (I) could be the average increase in prices of a comparable basket of goods and services. The X-efficiency could measure productivity increase in the firms.