First of all, let’s understand what surge pricing actually is. Surge pricing is when companies increase the price of a service when the demand for the service is higher than the supply the companies can provide. For example, imagine Uber or Yandex taxi. Normally, the ride from your school to home is $5. But when it’s raining, suddenly it becomes $10 or $20. Why is this happening? Because when it’s raining, the demand for taxis is higher than usual, everyone tries to get home faster. Lots of people call taxis at once, but the number of drivers is not enough to provide all of them with a ride. So the taxi app multiplies the price and:
- Fewer people want taxis now. Not everyone who wants a taxi is able to pay 2x more than they would normally pay.
- As taxi prices increase, more drivers are interested in it and are coming. Because if taxi prices are higher, then drivers' income is higher too.
So before: lots of people, fewer drivers. But after surge pricing, fewer people, more drivers. Everything is equal now. A taxi is available for everyone who wants it. Surge pricing is to prevent everyone from requesting rides at once and motivate more drivers to come online, so that the messed-up situation will be resolved.
Remember, surge pricing is temporary. After the temporary shortage of drivers is resolved, prices will go back to normal again. There are many cases other than rain that cause this shortage: bad weather like snowstorms; traffic jams and rush hours; after events like concerts, football matches, festivals; or sometimes the demand for taxis suddenly exceeds the supply. In those situations, everyone calls a taxi, while there are not enough drivers, causing surge pricing.
Other than ride-sharing apps, surge pricing happens in airlines, hotels, food delivery, and electricity. Let’s analyze them carefully.
Airlines: When lots of people try to get a ticket as the dates of flights approach, airlines increase the prices of tickets. So fewer people buy tickets, and the seats are enough for everyone. If they don’t increase it, then there will be more people with tickets than the number of seats in the airplane. I don’t think some people can fly standing up.
Food delivery: during peak lunch or dinner times, food delivery apps increase the prices of food. So that fewer people order food, and there are enough deliverers.
Hotels: during big tourist seasons or big events like the Olympic Games, there will be high demand for hotel rooms in the cities where that event/touristic seasonis happening. So the prices of hotel rooms just jumped.
Electricity: in some countries, the cost of electricity is higher during peak hours or times when lots of people use electricity (for example during winter when many people use electric heaters).
Why does it work? I think you already well-understood it. Not everyone calls a taxi when it costs 3x more than its normal price. And, more people try to do some taxi work when it pays 3x more than it would normally pay. Both people and drivers contribute to its success.
People, the consumers, often dislike surge pricing. Because it feels unfair. And, they are actually right from a consumer perspective. Yes, the whole system might be trying to solve the high demand problem, but who cares about the system and stuff when it charges you something expensive? Also, they hate it because of unpredictability. Imagine you take 20k UZS with yourself for a taxi, then suddenly you found out that it became 50k UZS because of a sudden traffic jam, and yandex app didn't warn you about it in advance! Unfair? Of course. There was this kind of situation with Uber. Sometimes it suddenly jumped 7-8x during emergencies and people reacted negatively to it. After that, Uber added surge notification to its app. When surge pricing is about to happen, it notifies the app users.
At first glance, surge pricing may look like a way for companies to maximize profits by exploiting people’s urgent needs. However, this interpretation misses one important thing. In reality, businesses are not just trying to extract more money, but to coordinate supply and demand in situations where resources are limited. By raising prices temporarily, they reduce unnecessary demand and encourage more suppliers to enter the market, helping the system stabilize. A well-functioning business, therefore, is not simply driven by profit, but by understanding and responding to the fundamental principles of how markets operate.
Does surge pricing always solve the situation? No, it can fail too. Sometimes, when there are major, sudden events like a hurricane, demand hardly decreases, and supply can’t increase. In other words, in extremely bad weather or situation, people don’t mind paying any amount of money to a driver - they just want to reach safer place, meaning that the number of people calling a taxi does not decrease no matter how price increases; and drivers also try to save themselves and don’t want to do taxi work in that situations, meaning the supply is not increasing. In that situation, surge pricing, increasing the prices of the service, fails to adjust the equality: supply=demand.
Concluding everything with one line, when many people want something at the same time, and there isn’t enough of it, the price of it goes up. And this thing happens no matter how people hate it or understand the purpose behind it.