WIRED:A FAIR PRICE. What does that mean? If you ask most of us, abruptly, when we're not expecting an economics exam, we'd say that a fair price is the cost of a good, plus a little on top for profit, writes DANNY O'BRIEN

Ask an economist and they’ll tell you there’s no such thing: just a dot on a demand and supply chart. The fair price for a load of bread demands on how much bread is being made, and how badly you want bread.

But what’s a fair price for something that has no quantity and for which the demand is unclear? What’s the fair price for software? Right now, there doesn’t seem to be any consensus – even from a single supplier.

There’s some who would say that the fair price for software is approaching zero.

Open-source software, code freely written and freely distributed, has been doing an amazing job of inserting itself into markets where software had previously cost thousands.

But despite free software’s penetration into commercial markets, which has continued for over 10 years, Microsoft still profits even in a world where three of its key markets – operating systems, database servers and internet server and browser software – all compete with products produced by no company and distributed for no charge.

In some ways, that seems crazier than either of the two scenarios most pundits would have predicted a decade ago.

Either free software could simply not compete with billion-dollar development budgets and would vanish into its own ghetto or corporate software would stand no chance against a zero-price point and collapse from having its profits competed away in the market.

Instead, it seems we live in a precariously balanced world where cost is not the determinant of a fair price nor supply.

Instead, some choose to live in a world of zero-cost software, while others are willing to pay hundreds of thousands to companies like Microsoft and Oracle for software that does pretty much the same thing as Linux and MySQL.

By now, Microsoft’s products and free software products (often called Floss, from Free/Libre/Open Source Software) have carved out their own, quite separate ecosystems.

If you were going to start a business from scratch, you might equally choose one or the other, but for most businesses, the cost of switching is so considerable that you are effectively limited to the products and choices that exist in your ecosystem.

Even after 15 years of watching the open-source ecology emerge, I still cannot begin to understand its economics – and I’m relieved that professional economists struggle too.

I feel more comfortable understanding Microsoft’s world, which is at least tied to normal pricing mechanisms. Perhaps that sense of security is why so many still choose it, rather than risk the unclear motivations and directions of open source.

But one aspect of Microsoft’s planning has become more important in the last few years, and in a way that casts it in an unfavourable light against open-source practices – price segmentation.

I can’t give you a price for Windows server product; I can give you over seven different prices for the Windows desktop product.

That’s because Microsoft now sells almost identical products at a vast range of different price points. Some of these pricing differences come from who you are; some from how much you buy from Microsoft.

For instance, you can obtain almost all of Microsoft’s usually very expensive programmer development software for almost nothing if you’re a student; a bulk purchaser of desktop licences can get a great deal too.

Microsoft’s reasoning behind this is entirely sensible. In some markets, they have to compete with free. To keep a steady supply of Windows programmers, after all, students need to learn to code using Microsoft tools instead of the free alternatives. In others, they can afford to charge far more.

But in many cases, the different prices are for the exactly the same product. Or worse, customers are offered different prices for the same product, but deliberately limited in a number of arbitrary ways. One cheaper version of Windows server will only recognise 32GB of memory, even if you have more than that installed in your machine. Another will only allow a certain number of remote users – even though the basic software is identical to a more expensive package.

Microsoft has good economic reasons for these multiple price points and cheap prices subsidised by costlier markets mean that more people get to use their software, which is good for them, and good for those new customers.

But there has to be something a little distasteful about using a piece of software that you know has been deliberately crippled before you bought it.

It feels wrong, as though you’ve been sold intentionally damaged goods.

Say what you like about open-source software, it’s impossible to deliberately limit it in this way. Anyone can remove any handicap someone builds into their open-source code. And it’s that contrast that leads many to think that it is Microsoft that charges unfairly – at any price.