Review of Industrial Organization 18: 269–271, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Microsoft’s Pricing of Windows: A Reply to Reddy,
Evans, Nichols, and Schmalensee
GREGORY J. WERDEN
U.S. Department of Justice, Washington, DC 20530, U.S.A.
Abstract. Despite arguments to the contrary, PC heterogeneity may go a long way toward explaining
why the price of Windows might be as low as it is.
Key words: Computer software, derived demand, Microsoft.
JEL Classiﬁcation: D42, L41, L63.
In a prior paper (Werden, 2001), I considered an analysis from the Microsoft mono-
polization trial of the proﬁt-maximizing monopoly price for Windows. I argued,
and Reddy et al. (2001) (hereafter “RENS”) have now agreed, that this analysis
was “too simple”.
I sought to demonstrate in particular that “the assumption that PCs are homo-
geneous matters a great deal”. To make this demonstration, I assumed PCs are
either “high-end” or “low-end”, with substantially different prices and demand
elasticities for the two PC types. I showed that heterogeneity of PCs and PC de-
mand can “make the elasticity of Microsoft’s derived demand far greater” and
“reduce substantially the monopoly price for Windows”. RENS say this demonstra-
tion was “ﬂawed” but don’t identify any technical ﬂaws; rather, they argue about
its relevance to the facts of the Microsoft case.
My paper considered “the plausibility of parameter values for which the actual
price of Windows is the monopoly price”. I assumed the actual price of Windows
was $50, which is the lowest approximation in the public record. Lacking hard
empirical support for many important parameters, my conclusion was merely that
heterogeneity of PCs and PC demand “may go a long way toward explaining why
the price of Windows might be as low as it is”. RENS erroneously assert that I
tried and failed “to show that $50 was the price that would have been selected by a
proﬁt-maximizing” Windows monopolist. In fact, I was not so foolish as to impose
such a burden on myself.
The views expressed herein are not purported to reﬂect those of the U.S. Department of Justice.
The government had the burden at trial to prove that Windows possesses monopoly power, and
the court found this burden was carried. Schmalensee introduced the “too simple” analysis of the