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

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  • Teddy Mekonnen

Abstract

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.

Suggested Citation

  • Teddy Mekonnen, 2025. "Luck Out or Outpay? When a Monopoly Competes with a Public Option," Papers 2507.12779, arXiv.org, revised Jul 2025.
    • Handle: RePEc:arx:papers:2507.12779
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    References listed on IDEAS

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