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Saturday, March 2, 2024

Wendy’s Denies ‘Surge Pricing’ Allegations, But What’s So Bad about Experimentation?

Even if the “surge pricing” fears were true, would that experiment really be such a bad thing?

Image Credit: Michael Form - Pixabay

Wendy’s came under considerable fire this week after news broke that the fast-food chain was planning to test a new “dynamic pricing” model. Part of a $20 million initiative experimenting with digital menu boards, the move was roundly condemned as an attempt to implement “Uber-style” surge pricing.

“There are people who view dynamic pricing as a rip-off,” said restaurant analyst Mark Kalinowski when the news first broke. “It won’t fly and guests will be very upset,” said restaurant consultant Arlene Spiegel. “You can’t surprise a guest with, ‘Your meal will cost another 50 cents or $1 today.’”

Senator Elizabeth Warren also joined the chorus of voices objecting to the idea. “It’s price gouging plain and simple,” she posted on Twitter (X), “and American families have had enough.”

Reacting to the backlash, Wendy’s put out a statement on Tuesday clarifying their intentions.

“We said these [digital] menuboards would give us more flexibility to change the display of featured items,” the statement says. “This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants. We have no plans to do that and would not raise prices when our customers are visiting us most.”

“Digital menuboards could allow us to change the menu offerings at different times of day and offer discounts and value offers to our customers more easily,” the statement continues, “particularly in the slower times of day.”

Wendy’s spokesperson Heidi Schauer echoed these remarks in a statement on Wednesday.

“To clarify, Wendy’s will not implement surge pricing, which is the practice of raising prices when demand is highest,” she said. “We didn’t use that phrase, nor do we plan to implement that practice.”

There seems to be some tactful reframing going on here. It’s much better marketing to say they are lowering prices during off-peak periods rather than to say they are increasing prices during a surge. But as the economist Brian Albrecht has pointed out, that kind of amounts to the same thing.

Further, while it’s true Wendy’s never used the “surge pricing” phrase, they did say “dynamic pricing.” And as The New York Post astutely pointed out, “dynamic pricing” is the term Uber uses to describe its system, which adjusts prices up and down based on demand.

So whether these statements from Wendy’s are a genuine clarification of the plan-all-along or a panicked attempt at damage control seems to be open to debate. In any case, what’s clear is that the burger eaters of the world have spoken, and Wendy’s is listening.

Is Surge Pricing a Good Idea?

For the sake of discussion, let’s say Wendy’s was in fact planning to go ahead with “surge pricing” as many people feared. Would this really have been such a bad thing?

The truth is, there are pros and cons.

The major con is, of course, that people ordering food at peak hours would have to pay more. Another downside might be the unpredictability of prices. If it’s important to consumers that they can count on a specific price, dynamic pricing would be an annoyance for them.

But there are upsides to consider as well. For one, charging more during peak periods would encourage some customers to visit earlier or later in the day, during the off-peak hours. This would have the effect of flattening the daily traffic curve, which would almost certainly reduce wait times during peak periods.

This is not a negligible benefit. People value their time, and many would probably be willing to pay an extra $1 for their burger if it meant they could get it in 5 minutes instead of 20 minutes at peak hours. Others might appreciate the opportunity to get discounts for eating during off-peak hours.

Dining room space may also be an issue at some locations. Higher prices can ensure that there is space to sit at all hours of the day, instead of having all the seats taken during peak hours.

Wendy’s may also see benefits to the operations side of their business. Maybe it’s really impractical from a staffing perspective to have extremely busy periods followed by extremely dead periods. If a gentler traffic curve makes staffing more efficient, it’s conceivable that those efficiency gains could lead to lower average prices for customers.

The Value of Experimentation

So, would surge pricing in the fast food industry be a net positive for consumers? I don’t know, nor does anyone else. Until someone tries it and we see the results, it’s all speculation.

What I do know is that there’s a lot of value in having different businesses experiment with different ways of doing things.

Think about it this way. If Wendy’s went ahead with surge pricing at some locations and it turned out customers really appreciated it for the most part, this would provide some very valuable information—and lead to positive changes. Wendy’s would likely expand the system, and competitors like McDonald’s and Burger King might adopt surge pricing at their locations as well.

If, on the other hand, the experiment were a complete flop, Wendy’s would take losses and quickly phase out the system. Competitors, seeing the bad results, would avoid implementing surge pricing in their businesses.

The point is, it’s incredibly helpful to consumers when companies take risks on new and innovative ways of doing business. When a variety of options are presented to us—the consumers—we can use our purchasing decisions to collectively “select for” the options we prefer and weed out the ones we dislike.

We can almost think of the market as a kind of Darwinian process in this sense. In fact, the economist Armen Alchian drew that exact parallel in his seminal 1950 paper Uncertainty, Evolution, and Economic Theory, which helped kick off the field of Evolutionary Economics.

The market involves “a process of economic natural selection,” he wrote. Thus, he suggested an approach to economic analysis that “embodies the principles of biological evolution and natural selection by interpreting the economic system as an adoptive mechanism which chooses among exploratory actions generated by the adaptive pursuit of ‘success’ or ‘profits.’”

In short, businesses try a bunch of different ways of doing things (variation) and then consumers pick which of those things they like (selection). The businesses that are “well adapted” to consumer preferences make profits and survive. The “poorly adapted” ones take losses and die out.

“Success is discovered by the economic system through a blanketing shotgun process,” Alchian explains, “not by the individual through a converging search.”

The market, like the environment, is all about trying a bunch of different things and then playing survival of the fittest. If you can’t serve customers effectively, you go out of business fast.

Now, with this understanding in mind, consider what would happen if businesses couldn’t try out a wide variety of approaches. What if some well-meaning politician bans “price gouging” or some other innovation?

There are two main possibilities. Either the banned approach is not something consumers would have gone for, in which case the market would have weeded it out quickly anyways, or it is something consumers would have preferred, in which case the ban is actively preventing a helpful innovation!

We can’t know a priori which is the case for any particular regulation. What we do know is that with every added regulation, the breadth of possible experimentation is curtailed, and with it, the possibility of discovering new ways of doing things that consumers actually prefer.

So, for the sake of consumer welfare, let’s resolve to allow unfettered experimentation, and to celebrate businesses when they take bold risks with unorthodox models. At worst, the risk will prove to be a bad idea and be quickly weeded out. At best, a brilliant new approach will be adopted across the industry, and consumers will be eternally grateful that they had the freedom to give it a try.

Additional Reading:

Should Wendy’s Introduce Surge Pricing? by Brian Albrecht

On Price Gouging by Donald J. Boudreaux

The Cognitive Bias behind Anti–Price Gouging Laws by Patrick Carroll

  • Patrick Carroll is the Managing Editor at the Foundation for Economic Education.