Microsoft's Pricing of Windows and the Economics of Derived Demand Monopoly

The economic experts in the Microsoft case debated whether Microsoft's pricing of Windows was consistent with Microsoft having a monopoly over personal computer (PC) operating systems. In this debate, PCs were treated as a single homogeneous commodity. This paper demonstrates that PC heterogeneity is likely to reduce substantially the monopoly price of Windows. The reason is that low-end PCs, which surely have the more elastic demand, are of disproportionate importance in determining the elasticity of derived demand for Windows.