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This paper analyzes the strategic interactions between a profit-maximizing
monopolist and a free, capacity-constrained public option.
By restricting its own supply, the monopolist intentionally
congests the public option and induces rationing, which increases
consumers’ willingness to pay for guaranteed access. Counterintuitively,
expanding the public option’s capacity may raise the
monopoly price and lower consumer welfare. I derive conditions
under which all buyer types benefit from a capacity expansion, and
extend these results to a setting where an oligopoly competes with
a public option. These findings have implications for mixed publicprivate
markets, such as housing, education, and healthcare.
