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Strategy
Why a price you can’t raise starts high
When firms can cut prices freely but struggle to raise them later, they set prices higher to guard against being trapped tomorrow – even in competitive markets.
Rapid read:
- Early findings from new German fuel market regulation designed to help consumers suggest that it increased margins and prices.
- Restrictions on future price increases create downside risk. To protect against this risk, firms build in a buffer from the start.
- Competition leads to a larger precautionary pricing buffer.
Picture a business where you can drop your prices whenever you like but only raise them following a notice period or by reprinting the catalog once a season. Many managers would consider this restriction a loss of flexibility. Yet research suggests that when you can move a price freely in one direction but face friction in the other, the constraint does not just limit your options; it quietly changes the price you should set in the first place, and it pushes it up.
We found an unusually clean version of this in a new German fuel rule. Since April 1, 2026, gas stations in Germany can only raise pump prices once a day, at noon, but can cut them as often as they like. The aim was to help consumers by taming the frantic price flicker throughout the day that made comparison apps almost useless. Yet economists at ZEW in Mannheim and DICE in Düsseldorf found that in the first few weeks following the introduction of the rule, gross margins rose by around six cents per liter on the common fuel grades, with the largest increases at small chains and independent stations. They gave their study a pointed title: “Predictable Prices, Higher Margins?”
That question mark is where the story gets interesting. A jump in margins right after a new rule is easy to dismiss as growing pains, a temporary blip, or statistical noise that will wash out. Alternatively, it could be the visible tip of something systematic, namely a result you should have expected all along. Our analysis suggests that the answer in this case is the second, and the logic has nothing to do with gasoline. It applies to any business that lives with one-way pricing.
An insurance policy against downside risk
Think of that once-a-day price as a ceiling the manager sets at the daily reset. During the day, they can slide down from it as much as they like, but they cannot push it back up until tomorrow. Set the ceiling too low, and if your input cost spikes in the afternoon, you will be forced to sell on wafer-thin or even negative margins until the next reset. So, as a buffer, you set the ceiling a notch high. This may cost you a few sales early on, but it buys insurance for the rest of the day. If input costs fall, you can lower the price; if they rise sharply, you are covered. Faced with that one-way flexibility, starting high is not greed – it is the rational move.
A domestic version would be a thermostat you can turn down any time but up only once a day. Worried it might get cold later with no way to reheat, you nudge it a degree warmer in the morning, just in case.
The price increase is not happening because consumers are being fooled or competitors are colluding. The price increase is rational even if every driver can instantly see every station’s price on an app and every station knows what its competitors are charging. It happens purely due to the mathematics of risk stemming from one-way flexibility. If downside margin risk exists, and upside flexibility remains, the rational decision is to start with a higher price and margin.
Why the effect is strongest in competitive markets
While you might expect fierce competition to reduce the effect, the theory predicts a larger precautionary pricing buffer. Where rivals are close substitutes – for example, when independent stations are fighting over the same drivers – each one’s price has to track its costs closely. That makes being frozen at a low ceiling when costs jump especially costly, so the insurance value of a higher starting price is greater.
That is exactly the counterintuitive pattern the Mannheim and Düsseldorf economists found. It also suggests a second prediction that can be tested in the future: the pricing premium should be larger when costs are more volatile and smaller when costs are stable.
Consequently, regulation introduced to protect drivers appears to have increased what they pay, with the largest increases occurring in the most competitive corner of the market.
If a drug company knows it will be very difficult or impossible to raise the price later, it has a strong incentive to set a high launch price.
Where this shows up in your business
This pattern extends far beyond gas stations to almost any business operating under asymmetric pricing rules.
In many countries, pharmaceutical firms must negotiate the launch price for new medicines with regulators. If a drug company knows it will be very difficult or impossible to raise the price later, it has a strong incentive to set a high launch price. One simulation suggests the launch price could be about 50% higher than in an unregulated market, simply because firms know they will not be able to increase it easily later.
Rent caps do the same thing from the other side: a landlord who can lift a sitting tenant’s rent by only a few percent a year front-loads the rent, charging (if permissible by law) each new tenant a premium to cover the restricted years ahead. And the same is true for service contracts, consulting retainers, software licensing, and almost any business operating under asymmetric pricing rules.
Because raising prices is hard and cutting them is free, the rational opening price drifts upward, most of all when costs are volatile and competition is tight.
Whenever you design, accept, or impose a one-way pricing rule, remember that you are not just limiting flexibility – you are setting the price.
Three takeaways for managers
- Make the buffer deliberate
Recognize that one-way pricing rules are already pushing you towards a higher starting price. Calculate this premium consciously rather than letting it emerge accidentally.
- Price flexibility into negotiations
If customers demand price guarantees in negotiations or lengthy notice periods, charge appropriately for the lost option value.
- Interpret competitors carefully
A competitor’s high posted price in a volatile, competitive market may reflect risk management rather than profiteering. Misreading it could trigger an unnecessary price war.
Whenever you design, accept, or impose a one-way pricing rule, remember that you are not just limiting flexibility – you are setting the price.
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