Luck Out or Outpay? When a Monopoly Competes with a Public Option

This paper examines how a profit-maximizing monopolist competes against a free but capacity-constrained public option. The monopolist strategically restricts its supply beyond standard monopoly levels, thereby intensifying congestion at the public option and increasing consumers' willingness-to-pay for guaranteed access. Expanding the capacity of the public option always reduces producer welfare and, counterintuitively, may also reduce consumer welfare. In contrast, introducing a monopolist to a market served only by a capacity-constrained public option unambiguously improves consumer welfare. These findings have implications for mixed public-private markets, such as housing, education, and healthcare.