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In 2nd degree price discrimination, the producer only knows that there are different consumer groups who have different demand curves. He thus adjusts the quantity/quality of the product in a way that the consumers will self-select into the according quantity/quality-price combination that maximises the firms profit.

Now, I do not understand how the price is being determined.

Specifically, Varian in Intermediary Microeconomics with Calculus (Figure 26.3) writes that consumers will for quantity/quality x01 pay price A which is the area below the demand curve.

Can someone please explain to me how this area below the demand curve can be understood as the price.

Many Thanks!

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In this book, pp. 484, Varian writes that: "the monopolist would like to offer $x^0_1$ at price $A$ and to offer $x^0_2$ at price $A + B + C$", and that this is not compatible with self selection. On to your question now;

In this diagram, Varian must imply that the producer will earn the amalgamation of each individual's willingness to pay in a unified stream of revenue - named 'price', or $A$, here. This price is not the nominal price of a unit of this product, as no such thing exists with price discrimination.

So, overall, consumers are willing to pay $A$ amount/price for the quantity $x_1^0$.

I consider this issue to be a matter of nomenclature (and I quite fondly remember one sadistically conservative TV host giving the same answer to a young Noam Chomsky).

Hope this helps, and welcome to the Economics SE.

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    $\begingroup$ This makes a lot of sense - thank you! $\endgroup$
    – Marta
    Aug 22 at 22:19

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