When using the Windows installer, a service is created. This service using the incorrect JVM arguments. When Confluence attempts to set up the database as part of the installation, it throws OutOfMemoryErrors as it runs out of PermGen space:

 -- referer: http://localhost:8090/setup/setupstandarddb-start.action?database=mssql | url: /setup/setupstandarddb.action | userName: anonymous | action: setupstandarddb
java.lang.OutOfMemoryError: PermGen space

Workaround (follow step by step instructions)

1. Use https://confluence.atlassian.com/display/CONFKB/How+to+Fix+Out+of+Memory+Errors+by+Increasing+Available+Memory#HowtoFixOutofMemoryErrorsbyIncreasingAvailableMemory-SettingPropertiesforWindowsServicesviatheWindowsRegistry to set properties for Windows service via the Windows Registry.
2. Modify Parameters/Java/JvmMS to 400 in hexadecimal (1024 in decimal)
3. Modify Parameters/Java/JvmMx to 400 in hexadecimal (1024 in decimal)
4. Modify Parameters/Java/Options and add -XX:MaxPermSize=256m as the first line.
5. Restart Confluence