In February 2024, Wendy’s announced it was testing digital menus that would let prices change throughout the day. The internet responded. Badly.

Within 48 hours, Wendy’s had issued a clarification. They’d apparently never meant to introduce surge pricing. They’d just wanted to use the screens for promotions. The menus would never punish you for wanting a burger at peak hour (you fiend). Deeply sorry for any confusion.

Airlines have been doing essentially the same thing for four decades. But nobody (other than some cranks and bored people with drones) is picketing Heathrow.

This is the puzzle at the centre of dynamic pricing. The economics are sound, the practice has been around for ages, and most people benefit from it regularly without even realising it.

Yet name it correctly, and you might get some strong reactions.

The thing nobody’s objecting to

Student railcards. Off-peak tickets. Early bird restaurant deals. Cheap seats at the back of the theatre. NHS prescription exemptions. Financial aid. These are all examples of price discrimination.

Charging different buyers different prices for the same underlying thing, based on their willingness or ability to pay. Nobody is writing outraged newspaper columns about student railcards (although, give it time).

A single price is a blunt instrument. Set it high, and you lose the buyers who’d have paid something, just not that. Set it low, and you leave money on the table from buyers who’d have happily paid more.

Economists call the combined waste “dead weight loss,” which sounds like a gnarly gym injury but means demand that existed and never got served.

Research on airline ticket pricing found that offering multiple pricing tiers increased overall profits by 35% compared to selling all seats at a single price. That’s not 35% more extracted from existing buyers. It’s 35% more value created across the whole system.

Price discrimination, done well, expands the market rather than just squeezing it. Utilisation maximised, to quote some people who like long words.

The version that saves lives

Consider HIV antiretrovirals (because I have asked you to).

In the US, the average cost per treatment course for modern biologics routinely exceeds $150 per dose, with breakthrough therapies launched at list prices of $200,000 to $3 million per course. That’s what the development economics require.

A drug priced for wealthy markets at a single global rate either bankrupts poorer healthcare systems or simply doesn’t reach them. The mathematics don’t allow a third option.

The Michigan Journal of Economics puts it plainly: forcing uniform global pricing for HIV pharmaceuticals leads firms to target only wealthy countries at high prices, leaving poorer countries without the medicine. Price discrimination creates a market that makes access viable at all. Hooray!

The same mechanism people despised when Wendy’s floated it to improve the distribution of chicken sandwiches is what makes antiretrovirals available to patients in sub-Saharan Africa.

Not a new idea

The early British railway companies didn’t invent third class out of generosity. They invented it because a train runs whether every seat is full, and an empty seat is revenue lost.

Third-class passengers, freezing in roofless carriages with standing room only, were making the journey economically viable for everyone else. The companies also made third class deliberately miserable, partly to discourage wealthier travellers from taking the cheap option.

Parliament eventually intervened with the Regulation of Railways Act 1844, mandating covered carriages at a penny a mile. The companies remained unhappy about this. They remain unhappy about serving passengers well to this day.

The first-class passengers didn’t subsidise the third-class passengers. Without the third-class passengers, the trips wouldn’t have been viable to begin with.

We hate it when we know about it

The reason Wendy’s couldn’t survive the news cycle, but airlines have operated this way since the 1980s, comes down to one concept: the reference price.

Richard Thaler, who won a Nobel Prize for this sort of observation, found that people don’t evaluate prices solely on affordability. They evaluate them against an internal benchmark for what seems fair. That benchmark is constructed from experience, context, and comparison. Disrupt the benchmark, and you get the fury, regardless of the price.

We know flights are priced dynamically. We’ve accepted the framework. We know a hotel room in the Cotswolds costs more in August. We know Glastonbury tickets aren’t priced on a cost-of-production basis.

A burger should cost a burgerish amount. Always. That’s the reference frame. Change it, and you’ve committed a transgression that no economic argument will immediately undo.

Research on Uber’s surge pricing found that riders who understood the mechanism (that higher prices during demand peaks bring more drivers onto the road) were considerably more accepting of it.

From segments to individuals

American Airlines’ SABRE system in the 1980s was the first large-scale commercial application of dynamic pricing, running dozens of fare classes simultaneously and adjusting in real time. The estimated additional annual revenue was around $1.4 billion.

What has changed since isn’t the underlying logic. It’s the resolution.

Segment-level pricing charges different groups differently, whether students, business travellers, or people booking six months out. Individual-level pricing charges specific people, based on what their data implies they’ll accept.

When pricing is personalised enough, the consumer has no reference point. They don’t know what anyone else paid. That invisibility reduces the fairness outrage while removing any ability to comparison-shop. Some people pay more, have no idea, and might feel very differently if the criteria ever became visible.

That’s the part worth watching.

A rose by any other name?

“Surge pricing” sounds like a penalty for wanting something at an inconvenient moment. “Dynamic pricing” sounds like a concept somebody presented at a conference in 2019 that nobody acted on.

Neither phrase conveys the actual value proposition: this structure enables serving more buyers in more circumstances than a single price would allow.

The early railways understood something about this instinctively. They didn’t call it price discrimination. They called it First, Second, and Third Class. They built the distinctions into the physical experience, so the different prices felt like different products. Nobody felt cheated, even if some people got very cold.

Systems built to extract feel different from systems built to allocate, even when the economics are identical. The ones that survive are either honest about what they’re doing or sufficiently familiar with the mechanism that it has faded into the background.

Wendy’s made the mechanism visible before it had time to become familiar. That was the mistake. Not the pricing strategy.

This article was written with the assistance of AI.