The Economics of Software Products: an Example of Market Failure

Abstract

In this paper we examine pricing imperfections in software companies by analyzing the case of Microsoft, and we uncover the presence of pervasive dead-weight losses derived from the inability of the producer to achieve first degree price discrimination. Because the nature of software is such that it can be reproduced an infinite number of times at practically zero cost once the first copy is manufactured, the amount of these losses in terms of efficiency can be substantial, which opens the door for external intervention in the market. We finish by suggesting a simple policy rule in this direction, although the applicability may be limited to the theoretical realm, as it can distort the incentives of private enterprise as a provider of software products