A regulation that limits price increases creates an incentive for the firm to introduce its product at a higher price and sell fewer units.
Lower output causes greater deadweight loss and harms social welfare.
This analysis is motivated by actions taken by the federal government to restrain price increases for pharmaceuticals. If there is only one firm in the market, then its profits can be expected to fall as a result of the price regulation. In a duopoly setting, however, the incumbent's profits could rise, because it benefits from restrictions on its rival. The entrant would like to launch its product at a low price in order to entice its rival's consumers to switch products. However, such an investment will only be made by the entrant if it can reap rewards of higher prices from repeat consumers in later periods.