Wendy’s management intends to begin using dynamic pricings in its fast-food restaurants. As we discuss in Microeconomics and Economics, Chapter 15, Section 15.5 (Essentials of Economics, Chapter 10, Section 10.5), dynamic pricing is a form of price discrimination, which is the business practice of charging different prices to different customers for the same good or service. The ability of firms to analyze customer data using machine learning models has increased the ability to price discriminate.
One form of price discrimination involves charging customers different prices at different times, as, for instance, when movie theaters charge a lower price during afternoon showings than during evening showings. As a group, people who can choose whether to attend either an afternoon or an evening showing are more sensitive to changes in the price of a ticket—that is, their demand for tickets is more price elastic—than are people who can only attend an evening showing. Price discrimination with respect to movie tickets results in movie theaters earning a greater profit than if they charged the same price for all showings.
In a conference call with investors in February, Wendy’s CEO Kirk Tanner indicated that next year the firm would begin using dynamic pricing of its hamburgers and other menu items by charging different prices at different times of the day. Tanner didn’t provide details on how prices would differ in high demand times, such as during lunch and dinner, and low demand times, such as the middle of the afternoon. Some business commentators, though, assumed that Wendy’s dynamic pricing strategy would resemble Uber’s surge pricing strategy. As we discuss in Microeconomics, Economics, and Essentials of Economics, Chapter 4, Section 4.1, Uber increases prices during periods of high demand, such as on New Year’s Eve.
The idea that Wendy’s would increase prices at peak times sparked a strong reaction on social media with many people criticizing the firm for “price gouging.” Rival fast-food restaurants joined the criticism. Burger King posted on X (formerly Twitter) that “we don’t believe in charging people more when they’re hungry.” As we note in Microeconomics and Economics, Chapter 10, Section 10.3 (Essentials of Econmics, Chapter 7, Section 7.3), surveys indicate that many people believe that it is fair for firms to raise prices following an increase in the firms’ costs, but unfair to raise prices following an increase in demand.
One way for firms to avoid this reaction from consumers while still price discriminating is to frame the issue by stating that they charge regular prices during times of peak demand and discount prices during times of low demand. For example, recently one AMC theater was charging $13.99 for a 7:15 PM showing of Dune: Part Two, but a “Matinee Discount Price” of $10.39 for a 1:oo PM showing of the film. Note that there is no real economic difference between AMC calling the evening price the normal price and the afternoon price the discoung price and the firm calling the afternoon price the normal price and the evening price a “surge price.” But one of the lessons of behavioral economics is that firms should pay attention to how consumers intepret a policy. Many consumers clearly see the two pricing strategies as different even though economically they aren’t. (We discuss behavioral economics in Microeconomics and Economics, Chapter 10, Section 10.4, and in Essentials of Economics, Chapter 7, Section 7.4.)
Not surprisingly, following the adverse reaction to its annoucement that it would begin using dynamic pricing, Wendy’s responded with a blog post in which it stated that its new pricing strategy 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.” And that: “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, particularly in the slower times of day.” In effect, Wendy’s was framing its pricing strategy the way movie theaters do rather than the way Uber does.
Wendy’s CEO probably realizes now that how a pricing strategy is presented to consumers can affect how successful the strategy will be.
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