Natural monopoly presents something of a dilemma. On the one hand, economic efficiency could be enhanced by restricting the number of producers to a single firm. On the other hand, monopolies have an incentive to underproduce and can generate unwarranted economic profits.
Nevertheless, it is important to recognize that monopoly is not always as socially harmful as sometimes indicated. In the case of Microsoft Corp., for example, the genius of Bill Gates and a multitude of research associates has created a dynamic computer software juggernaut. The tremendous stockholder value created through their efforts, including billions of dollars in personal wealth for Gates and his associates, can be viewed only as a partial index of their contribution to society in general. Other similar examples include the DeKalb Corporation (hybrid seeds), Kellogg Company (ready-to-eat cereal), Lotus Corporation (spreadsheet software), and the Reserve Fund (money market mutual funds), among others. In instances such as these, monopoly profits are the just rewards flowing from truly important contributions of unique firms and individuals.
It is also important to recognize that monopoly profits are often fleeting. Early profits earned by each of the firms mentioned previously attracted a host of competitors. For example, note the tremendous growth in the money market mutual fund business since the November 1971 birth of the Reserve Fund. Today the Reserve Fund is only one of roughly 500 money market mutual funds available, and it accounts for only a small fraction of the roughly $1 trillion in industry assets. Similarly, Lotus Corporation is now a footnote in the computer software industry. The tremendous social value of invention and innovation often remains long after early monopoly profits have dissipated.
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