Win95 Problem

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					MKTG 485
Spring 2004

                                      MICROSOFT WINDOWS 95
                                                (due May 10th)

In the late nineties, the U.S. government brought an antitrust lawsuit against Microsoft. Professor Richard
Schmalansee, an economics professor at the Massachusetts Institute of Technology, defended Microsoft
Windows' 90 percent market share. In his testimony, Professor Schmalansee provided the following insights:

Schmalansee disclosed that "the company had sold 125 million copies of Windows 95 for more than $7
billion-an average price of $56." Schmalansee also estimated "that if Microsoft could increase the price of
Windows by 5 percent, it could raise its pretax revenue by $173 million. A 10 percent increase would earn
the company an additional $345 million." Schmalansee asked, "Why would a profit-driven firm, not known
for leaving money on the table, pass up such easy money?" "No one," he suggested, "could possibly
conclude that Microsoft enjoys the quiet life of a monopolist."15


1 .How many copies of Windows would Schmalansee estimate to be sold if Microsoft increased its price by
five percent? How many copies would have been sold if Microsoft had raised the price 10 percent?

2. What is the price elasticity at a five percent higher price? At a 10 percent higher price?

3. On the basis of the estimated price elasticities, what would a monopolist do with respect to price?

4. What was the major source of competition limiting Microsoft's pricing power for Windows 95?

From TEXT, question 10 on page 221

In 2000, the market demand for personal computers was 129 million and the average price was $1922. The
average margin was 20 percent of sales. By 2003, prices dropped to an average of $1708 and sales grew to
161 million while average margins slipped to 17 percent of sales. What is the price elasticity over this time
period and how did sales revenues and total contribution (volume x margin) change?

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