However, some form of DOS is still useful today as part of an embedded real-time control system. But is everyone going to buy it? Not by a long shot. Is Microsoft making any money selling MS-DOS today? I seriously doubt it.
Value is linked to usefulness. DOS would have been useful to some computer use 30 years ago but no today, because it won't let the average computer user do what they would really most like to do, which is surf the internet, update Facebook and check emails. So yes, most users wouldn't find DOS valuable today, but that would have been different 30 years ago.
No, this is not the value of the software. This reflects only the market pricing mechanism. A consumer would find the next lowest priced software. It might be yet another free alternative, or it could be non-free but bundled with a paid operating system. If the next lowest priced alternative turns out to be unaffordable, I might choose not to buy it.
You are just describing the opportunity cost, which is a different beast. The opportunity cost just tells you how much more utility you get out of buying one rather than the other. And that is entirely consistent with my post. For example, if there are two pieces of software which have almost the same functionality, I might value them differently. Maybe I value software X at $250 and software Y at $200. Let's assume both are priced at $100. I would obviously buy X, because it is worth more to me. If the price of Y was dropped to $90, I would still buy X, because my gain from buying X for $100 is more (at $150) than the gain I would get from buying Y (now $110). (This is incidentally why dropping prices doesn't always work.) If however, the price of software Y were dropped to $40, then I would gain $160 from buying it compared to $150 from buying X. So I would then buy Y instead. This is simplistic, but that is what economics is about.
This is also why people will still buy Microsoft Office rather than download OpenOffice.org. The additional value they get from MS Office is still greater than the value of OpenOffice.org (which is entirely free). This isn't to say that they are valuing either MS Office or OpenOffice.org correctly, just that this is how value and price interacts.
The value of anything to anyone absolutely is the amount you would pay for it, and that is not equal to the market price.
The market price is just the point at which the supplier and the market meet in the middle, which isn't necessarily equal to the value everyone who ends up buying the software values it at. In economics terms, the whole demand curve (or line) tells you how much different people value a good. If I think the value of a copy of Windows is $30, and Microsoft will only sell it for $100, then I will not buy it. If I believe it is worth $500, and Microsoft is willing to sell it to me for $100, then I would buy it. I would still buy it if it cost $200, or $300 or $400 or $500, but not at $600. That is basic economics.
Read up on the consumer surplus http://en.wikipedia.org/wiki/E... to understand the difference between the price that people buy a product at, and the value they get from it.
Incidentally, this is why the paradox of the value of water and diamonds isn't really a paradox at all. of course water is more valuable, but it is also more abundant and supplied at a lower price (or free even). However, its price is not equal to its value.