Impact of price capping in the market of Covid tests

Abstract

With the first case of COVID-19 discovered in December’19 in Wuhan, China, COVID came knocking on India’s doors in January’20. With the first lockdown announced in March’20 in India, it was clear that rough times lay ahead. With a sudden outburst in COVID-19 in the Indian subcontinent, the previously controlled RTPCR and antigen tests were made available to the public. Given that the kits along with their constituent components were globally in short supply, their prices should have increased in line with microeconomic laws of demand and supply. But in April’20, Supreme Court of India made COVID-19 testing in private labs free for people covered under the Ayushman Bharat scheme and other economically weaker sections of the society while approving the ICMR cap of Rs. 4500 for general private lab tests. A price-cap on a commodity sets an upper limit on the price, below the free market price, that the diagnostic tests provider can charge. As microeconomics theory suggests, this price capping is introduced to protect the consumers from monopolistic exploitation while still maintaining a profitable business for the provider. It insists the laboratories to improve their operational efficiency and reduce the costs per test to maintain profit margins.