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!


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.

  • 1
    $\begingroup$ This makes a lot of sense - thank you! $\endgroup$
    – Marta
    Aug 22 at 22:19

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