Is there any logic to Microsoft’s Pricing?

This piece raises some great issues, using Microsoft as an example. The question:

At the time of the Justice Department's landmark antitrust case against Microsoft, the software maker was selling its Windows operating system to computer manufacturers for an extremely low price given the company's dominance in the market.

At the same time, it was charging significantly more for its Microsoft Office application suite. Given that both products had comparable market shares, why did Microsoft charge only about $60 for Windows–its "base" product–instead of the $1,800 that many estimate it could have demanded, and why did it choose to price Office–the "complementary" good–at nearly four times as much?

The idea that a monopoly is bad stems in part from the fact that they can overcharge, which leads to economic "deadweight loss." So why didn't Microsoft do it? The answer is that they had a base good and complementary goods as well (goods that depend on the base good). Pricing issues like this get complex because you want to maximize your total profit, not just your profit from one product. Thing get even more complex when you throw in the feedback effect.

So why did Microsoft price Windows so low relative to Office at the time of the trial–a practice it continues today? One possible reason, says Viard, is that "they don't want to crank up the price for Windows, the base good, because they don't want to choke off the positive feedback effect with those complementary goods that Microsoft does not produce, such as statistical packages and so forth. They control the price of Office, but they don't control the price of other companies' complementary goods. So they prefer to crank up the price of Office because people value it very highly and are willing to pay a lot for it."

In other words, people like Windows over other operating systems because there are so many software packages for it. If Microsoft raises the price, fewer people buy Windows. With fewer Windows users there is less incentive to produce a software package that runs on Windows because the potential market is smaller – which in turn means less demand for Windows…yada, yada, yada. These are thorny complex issues that must be dealt with everyday, which is part of the reason the big guys get paid so much.

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