After reading this chapter, you should be able to find marginal revenue given either a demand curve or a table of prices and quantities (as in Figure 13.1). Given a demand and marginal cost curve, you should be able to find and label the monopoly price, the monopoly quantity, and deadweight loss. With the addition of an average cost curve, you should be able to find and label monopoly profit. You should also be able to demonstrate why the markup of price over marginal cost is larger the more inelastic the demand—this relationship will also be useful in the next chapter.

What makes monopoly theory interesting and a subject of debate among economists is that it’s not always obvious whether monopolies are good or bad. Instead, we are faced with a series of trade-offs. Patent monopolies, such as the one on Combivir, create a trade-off between deadweight loss and innovation. The monopolist prices its product above marginal cost, but without the prospect of monopoly profits, there might be no product at all.

Natural monopolies also involve trade-offs, this time between deadweight loss and economies of scale. Deadweight loss means that monopoly is not optimal, but when economies of scale are large, competitive outcomes aren’t optimal either. Regulating monopoly seems to offer an escape from this trade-off, but as we saw in our analysis of cable TV and electricity regulation, the practice of regulation is much more complicated than the theory. Cable TV regulation kept prices low but it kept quality low as well. Overall, deregulation of cable television rates worked surprisingly well, at least according to the consumers who flocked to cable even as rates rose. In contrast, electricity deregulation left California at the mercy of firms wielding market power.

Economists don’t always agree on the best way to navigate the trade-offs between deadweight loss, innovation, and economies of scale. Many monopolies, however, perhaps most on a world scale, are “unnatural”—they neither support innovation nor take advantage of economies of scale—instead they are created to transfer wealth to politically powerful elites. For these monopolies, economics does offer guidance—open the field to competition! Alas, economics offers less clear guidance about how to convince the elites to follow the advice of economists.