Review of Industrial Organization 18: 263–268, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
A Monopolist Would Still Charge More for
Windows: A Comment on Werden
BERNARD REDDY, DAVID EVANS, ALBERT NICHOLS and RICHARD
NERA, 1 Main Street, Cambridge, MA 02142, U.S.A.
Abstract. Even when heterogeneity of demand for computers is taken into account, Microsoft’s pri-
cing of Windows is inconsistent with the government’s claim that Windows is a monopoly, protected
by high entry barriers. Werden’s claim to the contrary rests on confusion between local and global
maxima and on his use of assumptions about the PC market that are demonstrably false.
Key words: Antitrust, Microsoft, monopoly, pricing.
In U.S. et al. v. Microsoft, the government asserted that Microsoft had a monopoly
in the market for operating systems for Intel-compatible computers, a monopoly
protected by insurmountable barriers to entry. We tested this assertion by com-
paring its implications for the pricing of Windows with actual Windows prices.
Operating systems and computers are sold in essentially ﬁxed proportions by PC
manufacturers, which operate in an intensely competitive industry. When Microsoft
licenses its Windows operating systems through computer manufacturers, it can
also expect to receive revenues over time from complementary products such as
Microsoft Ofﬁce and later operating system upgrades.
If the government is right, Microsoft does not need to worry about entry and
should thus charge the short-run proﬁt maximizing price for Windows at all times.
Ignoring heterogeneity in the demand for computers, that price for Windows (t)
satisﬁes the following ﬁrst-order condition:
t =−p/ − r =−
c + r
where, following Werden (2001), p is the price of a PC including Windows, c is
the price of a PC net of the cost of Windows (c = p − t), r is complementary net
Reddy, Evans, and Nichols are with National Economic Research Associates and are consultants
to Microsoft. Schmalensee is Dean of the Sloan School of Management, Massachusetts Institute of
Technology, and testiﬁed as Microsoft’s expert economic witness in U.S. v. Microsoft.