What I'd like to know is, are NV's larger dies the driving force of the market prices? Are NV stuck with prices that they have to charge and are AMD just taking advantage of that to sell at a higher price? If not, why aren't AMD able to sell for less and if so what's topping them undercutting NV and taking a larger market share?
The size definitely does make it more expensive. NVIDIAs gpus are basically graphics processors + parallel processors. Therefore they have some advantages (e.g. scientific computation, tesselation, PhysX etc). AMD has a price/performance advantage in traditional graphics.
If AMD could they would probably sell and price their products as aggressively as possible to remove NVIDIA as a competitor. In fact this is probably the reason NVIDIA is slightly more expensive than AMD in pure graphics performance. For some of us the added compute and host of other features (like 3D) make NVIDIA the only choice we can ever make.
But NVIDIA can remain competitive because they can afford to make little to no profit on some of their products and try to make up that profit in other areas, being a bigger company than ATI catering to a broader market. I don't know too much about the economics side of it, but I've heard that NVIDIA makes a big chunk of its profits from the professional sector - AMD has no part in that.
But it's also because NVIDIA is designing products for a broader market segment with a wider set of features that its GPUs are architected differently, and therefore larger dies are necessary.
Ultimately, the new architectural features of NVIDIA gpus are design constraints/goals. And cost is always a design constraint in engineering, and cost-minimization is a very standard no matter what you do.
AMD could make a bigger die, and it would have to if it wanted to improve its gp features. but as it stands AMD cards are targeted exclusively towards gamers and so it doesn't have to. NVIDIA cards, on the other hand, have other additional design goals.