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Why Surge Pricing Feels Wrong (But Might Be Right) - Future IQ

3,160 views Wait, is this logic right? • Jul 04, 2025
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Slog Reference: Fixed Prices vs Dynamic Prices

Description

Ever wondered why your Uber fare doubles when it rains, or why Wendy’s decided to try AI-powered surge pricing for burgers? Is dynamic pricing just another way for companies to squeeze more money from you — or does it actually help fix hidden problems in the market?
In this episode of Future IQ, we dive into the surprising truth behind fixed prices vs dynamic pricing. From the Supreme Court of India questioning hospital rates, to Goa effectively banning Uber and Ola, to movie tickets that once sold “in black” — you’ll see how price controls can sometimes make things worse, not better.
But surge pricing isn’t always the hero either. When bottled water prices shoot up during a natural disaster, or electricity bills soar in a heatwave, it feels more like exploitation than smart economics. So when is dynamic pricing good, and when does it cross the line into pure greed? And why do we, as humans, hate unpredictable prices so much — even when they solve shortages?
Watch till the end to find out why even the Supreme Court seemed confused, and why you might actually benefit from paying more during peak times. Also, don’t miss our earlier episodes on Supply & Demand and how substitutes & complements play tricks on your wallet.

More Videos:
The Invisible Supply & Demand in Our Everyday Life: https://youtu.be/imweTGK0Myk
Choices Are Ruining Your Life: https://youtu.be/LjeOHVfXYOY
The World Is Getting Better That You Think: https://youtu.be/2l0jnwf-2kA
Are You Paying More Than Others?: https://youtu.be/gyyVUjInirg

00:00 Introduction
00:23 Surge Pricing For Burgers - Wendys
01:15 Is Fixed Pricing Better?
01:58 Black Market of Autowalas
03:40 Coldplay & Scalping
05:51 Table Reservations In NY
07:37 Surge Pricing vs Fixed Pricing - Which is better?
08:58 How to fix this problem?
09:56 Benefits of Surge Pricing - Innovation
12:14 Surge pricing for fixing the supply
13:24 What happens when Demand & Supply Match?
14:08 Surge Pricing is a bad idea!
16:55 How to achieve the equilibrium?
19:05 Where did Wendy go wrong?
21:00 Economics and psychology go hand in hand.
21:59 Dynamic Pricing: good or bad?

Sources:
Tim Hardford on Swifties, vacations, and hygiene
Restaurant booking scalpers in New York
Supreme Court on fixed prices in private hospitals
https://arstechnica.com/information-technology/2024/02/wendys-plans-ai-powered-menu-to-change-food-prices-based-on-demand-weather/


Hope you enjoyed FutureIQ by Navin Kabra and Shrikant Joshi. Do hit us up on Twitter:
@ngkabra http://twitter.com/ngkabra
@shrikant https://twitter.com/shrikant

Listen it on the podcast provider of your choice: https://tapthe.link/FutureIQRSS

#FutureIQ #Pricing #SurgePricing #Uber #Wendys #Economics #Goa #IRCTC

Related Slog Matches

Fixed Prices vs Dynamic Prices

Date Proximity

45.00

Transcript

Shriant, do you like search pricing? No, I don't. Who likes search pricing? Nobody likes search pricing, right? So, yes, you're right. Lots of people hate search pricing, right? So, when Uber and Ola, they suddenly increase prices during peak times or when there is a festival, everybody hates them because, you know, they see this as price gouging in the time of need. Yeah. Yeah. Uh, another lovely example is Wendy's, the fast food chain in the US. They introduced digital menus, okay? And they said they would dynamically increase the prices of some of the items during peak hours, right? So, search pricing for burgers and people hated it so much that Wendy's had to withdraw that. Okay.
Yeah. Because I want to know when I walk into a burger joint like Wendy's that I'm paying this amount for a burger and not more or less every single time I walk in. Much worse is that when there is a natural disaster, essentials become insanely expensive. I'm hearing right now that packets of Parli are going for thousands of rupees like $30 $40 in Gaza right now. Parli glucose biscuit brand. Yes. Wow. Okay. I mean sad but wow. Yeah. So yeah, search pricing is terrible, right? Yeah. So fixed pricing is better. Not really.
Right. You know there is one class of people who love search pricing. Which class of people? Economists. Okay. So let's try to understand what the economists know that the rest of us don't know. Right. Yeah. So fixed prices are bad in a specific sense. Okay. When the prices have been fixed by someone like the government, the problem is that now the prices cannot adjust based on supply and demand. Right? We have done an episode on supply and demand. Why that is so important. Check that out.
But the basic idea is that when supply is short or demand is high, prices should go up. Right? Correct. And if the prices remain fixed, there is a problem. Take the example of meter rshas which used to exist before Ola and Uber. Right? Where the prices were fixed by government based on the meter. And now suddenly there used to be all kinds of refusals, right? people who want to go short and the rual used to just refuse or certain areas they will not go or then they would you know basically a black market would develop saying that well meters we will not go by the meter right and all of that. Yeah. And just in case
you hate Ola and Uber let me tell you those days were not good days right? They were terrible. I mean I remember I had to go from the university to a certain point which is about 250 m but I was carrying a huge luggage. There was absolutely no auto ricksha available. Everybody kept saying it short distance we will not come and I had to lug that entire luggage all the way by myself sweating and whatnot. Even today if anyone goes to Goa you can ask them what you feel about the public transport there and they will hate it. And the reason is because the government there has banned Ola and Uber from operating.
And so all these problems that we talk about they exist in the Goa market effectively banned as of recording it's just draft guidelines. They are supposed to be finalized on the 30th of June. So you know that this is happening before 30th of June. But uh yeah the way the guidelines have been framed Uber and Ola are almost impossible to operate in that market. Yeah. And if prices are fixed but demand fluctuates then there is going to be problems. Right? So take the example of concert tickets. Okay. For PR reasons the promoters of concerts don't want to set ticket prices very high.
Correct. But suddenly Coldplay comes to India totally misjudges the demand and it was insane what was happening. People were buying tickets even though they didn't need it. holding them and then trying to sell for 50,000 40,000 scalping big problem with that and when I was young the same thing used to happen for everything okay telephone lines scooters gas connections all of this the supply was fixed demand was insane prices were fixed by government because we were living in like the government raj of nonf free non-liberal markets and it was insane either you could wait 12 years for a telephone or pay an insane amount in the black market, right? Yeah. He's not kidding when he says 12 years. It
was actually a 12 year waiting list for your own landline telephone. Crazy. But a gas connection, if you ever gave birth to a girl child, you would book a gas connection in her name so that when she gets married, she will get the gas connection. Okay. So, yeah, fixed prices is not a good thing. I know. I know. Fixed prices created a lot of issues like secondary markets that you mentioned like scalping that you mentioned like uh and what people used to do was they would try and find connections so they could get those things early. Exactly. And all of these are workarounds that people use to basically handle the fundamental problem which is supply is fixed, demand is very
high and there is no way to decide who gets this because all of them can afford it. Correct. If prices were allowed to increase, the prices would increase until only the right amount of people can afford it. Right? But instead now you have to come up with other things. So that's why you use connections. Oh, do you know somebody or then there is a black market and then the price rises in the market black market and so on. Right? Yeah. But you might think this is just like a problem from you know India and socialism. But it is true even in advanced countries today. Right. Really in the US restaurants in New York for PR
reasons again they don't want to raise prices right as a result some restaurants are booked for 6 months in advance yes what happens uh again the same thing connections I know someone I know the chef personally I know the chef's friends dogs walker etc that happens which we see on a lot of cereals in the US right but there are people what they do is they go and make those bookings and then as the date comes closer, sell those bookings. Okay. A guy called Alex Eler sold one booking for $1,000, another for $850 and generally he made 70k last year just from making restaurant bookings and selling them to people. Wow. This is entrepreneurial on a very different
level. Hats off to him. But also what? Yeah. But this is not done. Yeah. Uh another example from India still valid today is that Indian railways the supply number of seats is fixed and prices are fixed at fairly low levels by the government of India which means that for most trains it is almost impossible to get reservations. Right. Correct. Booking opens 60 days in advance and then at 10:00 a.m. within 5 minutes the entire train gets sold out. Yep. This has been a constant complaint with anybody who's tried to log on to IRCTC and try to book a Tatkal ticket on the day of or just 24 hours prior to the departure of the train. So fixed pricing
isn't any better either. Search pricing we've already established has its own problems. What with there has to be some better. Yes, I agree this is confusing right that's why this episode but to show how confusing it is. Even the Supreme Court of India is confused. What? In February 2024, the Supreme Court of India asked the government why it hadn't fixed rates for medical services in private hospitals in India. Right? Because oh, private hospitals are gouging patients. I mean, in April of the same year, the Supreme Court asked the exact opposite question. How can there be uniform rates even in private hospitals? Okay. So, it is a mess. I mean okay if the Supreme Court of India
is confused then types your future IQ so there is still hope okay let us look into the underlying principles and maybe that will help right so the reason fixed pricing is bad is because when the demand is high and the price cannot change this results as we saw in black market or using connections or hoarding uh one important thing we didn't talk about is insane cues right Yeah, because demand is so high. Okay, think long cues outside the iPhone store, Apple store whenever a new iPhone model is launched.
Now, think of those cues for everything in life. Right now, what is the right way to fix this problem? Right. The problem is the mismatch between supply and demand. So, either you increase the supply or you decrease the demand. Correct? Right. Now, if you don't increase the prices, there is no reason for demand to decrease. Correct? If you don't increase the prices, there is no reason for the suppliers to supply more. Correct. Right? So that is what fundamentally search pricing achieves. Right? It does both things. Initially when the prices increase, a bunch of people drop out saying I cannot afford this. Right? Correct. Prices keep increasing until a point where the number of people who can afford it
exactly matches the supply. Correct. And then everybody is happy except the poor people who can't afford it. Okay? We'll come to the poor people later. But yeah, this is one way of matching supply to demand which is efficient in terms of economics, right? There is no wastage. Okay. Okay. Okay. But consider some of the good things that come out of it. Okay. One is that when the prices increase and the people who are dropping out, what are they doing? A lot of them find more efficient ways of doing the same thing. Alternatives, right? More people start taking public transport, more people start using the bus, that's a net good for society, right? True.
Some people figure out ways of not doing whatever, right? As in, oh, let's me just use a zoom call instead of going to hijabi every day, right? That is again a net good for economy and so on. Right? So, a whole bunch of workarounds to not use that scarce resource. Right? Correct. Let me give some other examples. Right? After the Ukraine war, fuel prices went up significantly in Europe. True. And because of that, heating prices went up. It was winter, right? Yeah. So, people innovated, right? They reduced their heating costs by using double glazed windows, using thermostats to cut off heat, uh unnecessary heating. They used heat pumps, things like that. Right. And all of this reduced the total amount of
energy used in the countries. Right. Right. Overall, this is a net good for the economy and for the world and the environment. Okay. In Cape Town, South Africa, there was a huge severe water shortage. And again, people innovated, right? What they did was graywater systems, water saving devices, Dropula to detect leaks in pipes, right? Yes. Lovely. Right. Shower savvy which collects water during the shower which can be reused elsewhere. Right. a whole bunch of innovations came up. Right? So this is how reducing demand doesn't just mean that poor people are going without.
It also means that lazy people who were using this just because it is cheap now find better ways of using it or they reduce their unnecessary usage. This actually goes back to the reducing choices episode that we did because by reducing uh by bringing that people out of the queue sort of you are essentially reducing their choice and therefore forcing them to innovate to be creative in acquiring similar results but not from the same source. Correct? Here is the other part that we haven't talked about. Another way to fix the mismatch is to increase the supply. Right? Okay.
Now let us look at what search pricing does there. Okay, there is a shortage of taxis in let's say the Korea park area of Pune right because of dynamic pricing the prices go up correct now taxi drivers elsewhere who are sitting idle far away right they see oh my god Korea park people are making a lot of money so a bunch of drivers flock there ah right and if overall in Pune there is a shortage of drivers Uber drivers right so everywhere prices are high what happens is that people from outside, from villages, they give up their farms and they come and start driving taxes here because this is a good way of making money. And this is only works
because of search pricing, right? Prices go up and more people are willing to produce the supply, right? Usually it means that they were doing something else that was less lucrative, making less money for them and they switch over here because the demand is here. M okay two things about that when supply increases like drivers coming in from other places to Pune then that creates sort of an equilibrium also in the market right so what happens there is that at this point the demand and supply are matching so the prices are going to start falling right right the earlier high prices are no longer necessary but they came in because of the high prices now the prices have fallen so they go
back equilibrium right for a little while it goes up and down there's an over supply for a little while and then the prices fall then some of them go back and so on right and then it reaches that final state where it is like okay the supply demand both are satisfied and the number is also satisfactory the other question I had is increasing the prices because of surge pricing also means that some people who need it for whom it's a necessity they can't afford it isn't that bad that's a great point okay so that is not the only one there are a bunch of times when increasing prices or surge pricing is a bad idea.
Okay, so let me just go through all of them and at the end you will get the answer to your question. Right? So what we said is that increasing prices is good because when there is a mismatch between supply and demand, increasing prices causes either the demand to reduce in good ways or the supply to increase in good ways. Right? Except that there are times when these cannot actually happen in good ways. Okay? So let's start with a simple example. For example, there is a heat wave. Okay. Now people dying of heat stroke is not the right way to reduce demand for AC. Yeah.
Okay. So supply is fixed. You can't suddenly increase electricity or AC supply in like 2 days. Correct. Uh right. So that's not a good time to be increasing prices of things that get people cool. Absolutely agreed. more generally any natural disaster right say supply of bottled water right okay now it's a natural disaster this is not a situation that's going to continue forever just it's needed for a few weeks there is no point in increasing the supply uh and it can't be done so quickly correct at this time and demand can't be reduced it's water you need water yeah so then somebody has to step in and make sure that prices don't increase and the supply is there and if
the supply is not there then there is some sort of an equitable distribution right correct the market cannot handle this properly governments have to do that right correct a third reason why prices can go up is because there is a monopoly right there is only one company supplying something and whatever price they decide to charge people have to pay correct right and that company can keep supply very limited for example check out our episode on diamonds. Okay. Yeah, they are a scam and that's if you want to know more about that, go check out the episode. And especially when there is one company that has a monopoly like the diamond guys, they can do a lot of
things to prevent other people from coming in and increasing the supply. Right? True. So this is a very bad situation to be in. And again here it is the government's job to ensure both that the monopoly doesn't increase prices and that the monopoly does not prevent people from coming in and increasing the supply. Right? Competition is necessary to maintain prices at a sensible level. Correct? So most importantly basic human needs emergency services right those are needed continuously ongoing basis but that is not a thing where you want to reduce the demand right that's a demand that is dictated on the spur of the moment I don't think there is a way to reduce that demand well we kind of do in
India right people I mean who get sick in a village they don't have access to a specialized doctors so whatever the local guy gives they take that and die or just deal with the consequences. So yeah that happens right that does happen I agree ideally the supply needs to increase but there are lots of complex reasons including inefficiency corruption this that because of which it cannot increase but then in absence of that happening long-term that should happen and slowly we work towards that we like plaud towards improving the situation and it does work right check out our episode on how the world is improving in fact while you're checking out all of these episodes just hit the
subs subscribe button because there is tons of other things. We'll also keep coming up with this thing that Naven just spoke about. I think we'll do an episode on it one of these days and you should subscribe and uh get notified every time something new drops. But the point is that it's not fixed right now and essential services are essential. Uh and if you just leave it to the market, the prices are going to go up and poor people won't be able to afford it. So government has to step in and ensure either that there are fixed prices or government gives subsidies so poor people can afford the higher prices or government supplies at least some of
this so that the poor people can get it. And when I think about it, it is basically in this territory that the entire Goa Uber Ola taxi debate is happening. There are of course a lot of nuances there. There is the problem of local employment and then there is the problem of uh tourism also needing to thrive in Goa. Lots of nuances to be figured out there but uh I think a lot of what Naven has said so far in this episode will allow you to tease out those nuances if you think if you apply all of these frameworks or lenses. But now I'm thinking back to the Wendy's example that you gave where the burger
prices were fluctuating depending on demand and surge pricing was an interesting way, a logical way to meet that demand. But people hated it. Why would people hate something that actually ensures that they get a burger when they're hungry? Right? So here is a problem with humans, right? Humans are emotional creatures, right? So, psychology of search pricing is also a problem, right? Most humans are not economists and as a result they don't understand what search pricing is doing and why search pricing is a good thing, right? Because you know Wendy's is not a natural disaster and it is not a essential basic for life, right? So they should be allowed to do that but humans hate it and if humans hate something
then that is going to not happen right. Um so yeah what Wendy's should have done they should have realized that this is going to happen because humans are humans yeah and irrational. Yeah. What they should have done instead of saying that we will increase the prices during peak hours they should have increase the prices quietly and then say oh we have a digital menu which will decrease the prices at off peak hours. Okay people love discounts. Okay. They would have loved it. And this is exactly what uh your Vness day ladies free is and happy hours are and all of that, right? Yeah. Uh this reminds me of an episode that we have been planning on
the psychology of uh product pricing. We've done an episode on product pricing and we are also talking about psychology of sales and marketing tricks that companies use. Subscribe. You'll get to know when that drops. Yeah. But this also explains why New York restaurants in spite of this insane demand are not increasing their prices because as soon as they increase prices there will be newspaper articles saying how they are price gouging and they're like capitalist pigs and all of that and so they keep the prices low. Plus also this long waiting list is a good signaling thing. Then everybody thinks oh this must be a really good restaurant right?
Yeah, it's not just pure economics. There is a whole bunch of psychological reasons. Yeah. And sales season is upon us. So all of the psychological reasons are something uh we'll go into a little deeper. But to summarize the whole discussion that we've been having so far, fixed pricing has its own set of problems. Surge pricing has its own set of problems. But each one of them is absolutely necessary in certain contexts. And those contexts cannot overlap or cross over. Yeah. I mean, I would put it this way, right? By default, dynamic pricing is a good thing because it encourages frugality. It encourages efficient use of resources.
It discourages waste and it encourages innovation. It encourages increasing of supply of things that people actually want. Except that when it is particular situations like basics and essentials and uh natural disasters and so on then at that time and monopoly at that time you want fixed prices. All other times dynamic prices are a good thing. Embrace them. Do not give into the psychology of just being angry at all the capitalist pigs. Okay? Some of the capitalist pigs you are allowed to be angry at. I give you permission to be angry at them because I am sometimes angry at them.
But uh regardless of that uh there is very interesting nuances in this entire capitalistic discussion that we will go into in the subsequent episode because there is now there are plenty of questions forming in my head but we'll get to them a little later in a future episode. for now. Shriant Naven Future IQ