Rationing Poor Consumers to Reduce Prices

We study how rationing in the public sector influences prices in the private sector. A private firm uses consumers’ cost information for cream-skimming. Only rationed consumers consider purchasing from the private firm. Rich consumers are more willing to pay for an indivisible good, such as a health treatment, than poor consumers. The public supplier decides on a rationing rule, and then the private firm reacts by setting prices. In equilibrium, the public supplier must ration both rich and poor consumers. Supplying all poor consumers leaves only rich consumers to the private market. The firm reacts by setting high prices because all available consumers have high willingness to pay. Rationing some poor consumers provides an incentive for the firm to reduce prices because some consumers with low willingness to pay are potential customers.