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Surge Pricing Burgers and the Importance of Reading the Whole Post

Written by Al Slivinski on . Posted in Education, News Media. No Comments on Surge Pricing Burgers and the Importance of Reading the Whole Post

Wendy, Wendy what went wrong? – Brian Wilson and Mike Love

Some weeks back a news story made the rounds that Wendy’s CEO had announced in a call with investors that the company was planning to institute ‘surge pricing’ in its restaurants. You can read a somewhat outraged story about it in the NY Post here, if you missed it. Surge pricing in this case would mean that what you pay for items on their menu would vary with the time of day, as does the amount of business at Wendy’s – busy times would see higher prices. The technology to do this is the installation of menu boards at the drive-thrus on which prices could be changed electronically whenever desired. Presumably the same would be true for the in-store menu boards, also.

Anyway, this generated a mostly predictable amount of outrage from mostly predictable quarters, but I am writing about this not because of the pricing itself, or the outrage, but rather about what happened next. On February 28 the Globe ran an Associated Press article with the headline “Wendy’s says it has no plans to raise prices at busiest times at its restaurants”. Similarly, CNN’s website (a place I rarely go) ran an article on Feb 28 titled “Wendy’s says it won’t use surge pricing’.

To its credit, CNN also provided a link to the blog post in which Wendy’s supposedly backtracked from its CEO’s original statement to investors about this. You can read that post here also, if you like.

However, what convinced me this was worth writing about myself, was an Opinion article that appeared in my print edition of The Globe and was headed up thusly:

Surge pricing for burgers? Wendy’s was wise to reject it

Woonghee Tim Huh and Steven Shechter

Special to The Globe and Mail – Feb 29, 2024

Woonghee Tim Huh is professor and chair of the operations and logistics division at the UBC Sauder School of Business and the Canada Research Chair in operations excellence and business analytics.

Steven Shechter is a professor in the operations and logistics division at the UBC Sauder School of Business and the WJ VanDusen Professor of business administration.

****

You can read the online version of this Globe article here. In it, the UBC guys explain, sort-of, why it was wise of Wendy’s to back off from their original surge pricing plan.

No doubt Bus School profs have superior insight into firm pricing than do I, but it seems to me that it behooves all of us to read what the firm in question has to say about what they are doing before analysing what they are doing. Professors Huh and Shechter do quote from Wendy’s ‘backtracking’ blog post, in the paragraph below, quoted directly from the Profs’ G&M article:

So, on Wednesday, Wendy’s said its dynamic pricing plan would not raise prices during busy times. The plan, the company said, would only “allow us to change the menu offerings at different times of day and offer discounts and value offers.”

Point one: learn to use ellipsis if you only quote part of a sentence. Here is the full sentence from the actual Wendy’s blog from which the good Professors’ partial quote is taken:

“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.”

Point two: everything that is important about the actual sentence posted by Wendy’s is the underlined part of it at the end which the Professors left out of their own quote. Had they included it, they might have felt compelled to explain how ‘raising prices during peak times’ differs from ‘offering discounts during slower times of day’, and that would be a truly difficult task, because there is no difference.

Back when I taught price discrimination strategies in my Managerial Econ class, I would start with something familiar to everyone – Seniors pricing. You know, you walk into the movie theatre and find something that looks like this:

Admission: $15.00

Seniors (55+): $12.00

(Sidebar: I would ask my students why so many businesses offer lower prices to seniors, and get lots of responses about corporate altruism and Seniors being on fixed incomes. It was fun then to show them that this pricing increased profits for the firms, no altruism needed.)

But I digress.

My point is that one does not see this sign in a theatre:

Admission: $12.00

Under 55: $15.00

There is no bloody difference in the price anyone pays for a theatre ticket with the two different signs, but the second one just seems so mean, while the first one seems nice.

Well, it’s the same with Wendy’s pricing: offering discounts at slow times seems nice, adding a premium when it’s busy, well that’s just mean, and Wendy’s would never do that. They said so, after all.

Minor point: If Wendy’s actually had, in some alternate universe, backtracked from surge pricing, I can’t say there is anything in the Sauder School authored Globe article that convinced me that backtracking would have been wise, the headline notwithstanding. However, since Wendy’s did not backtrack, that point seems not worth pursuing.

Not so minor point: Since it is clear from their own blog post that Wendy’s is going to install these quick-price-change menu boards, the following scenario becomes possible. The drive-thrus already have cameras focused on the cars in the queue, so it would be easy to build a data base of licence plate numbers at each store, or even across stores, so the store could determine, for example, how regular a customer they were serving. If Wendy’s corporate strategists have kept up with what goes on at insurance companies, they could then program their menu boards to show higher prices to frequent drive-thru-diners.

I used to teach students about that sort of ‘disloyalty pricing’, too, because insurance companies do employ it – they call it ‘price optimization’, and last I read, some US States were trying to ban it.

Shattering illusions, that was always my mission.

Coda: Before this post went to press, the WSJ published another article on surge pricing and other restaurant strategies. A quote from that article:

While some consumers tend to resent surge pricing, as Wendy’s discovered last month, they like happy-hour discounts and other deals at slow times, industry consultants said.

Whatever would the world do without industry consultants?

 

Sci-fi in aid of Science

Written by Editorial Team on . Posted in Education, Research, Standards. 1 Comment on Sci-fi in aid of Science

I was a pretty big fan of science fiction in my younger days, and still read some from time to time. I think Frank Herbert’s  Dune is a great novel (the sequels not so much), enjoyed reading works by Heinlein, Le Guin and Asimov.. 

One of the genre’s leading lights back then was Arthur C Clarke, who wrote the novel 2001: A Space Odyssey (in 1982) [not true, see below] on which the film was based. I was not a Clarke fan, don’t remember that I read any of his stuff. However, he made an interesting contribution to the culture beyond his books themselves, when he formulated three ‘laws’ regarding technology that have come to be known as Clarke’s Laws. He didn’t proclaim these all at once, and in any case it is the third law that is most cited, which so far as I can determine first appeared in a letter he wrote to Science in 1968. [If anyone has better info on the third law’s original appearance and antecedents I’d love to hear it.]

Clarke’s Third Law is: ‘Any sufficiently advanced technology is indistinguishable from magic.’

That strikes me – and many others, apparently – as a perceptive statement. Think of how someone living in 1682 anywhere in the world would regard television or radio. 

As with any perceptive and oft-repeated assertion,  this prompted others to lay down similar edicts, such as Grey’s Law: “Any sufficiently egregious incompetence is indistinguishable from malice.”

[I cannot trace Grey’s law back to anyone named Grey – if you can, let me know.]

Note that there is a difference, as Clarke’s law speaks to how something will be perceived, whereas Grey’s points at the consequences of incompetence vs malice. If you are denied a mortgage by a bank despite your stellar credit rating, the impact on you of that decision does not depend on whether it is attributable to the credit officer’s incompetence or dislike of you. 

On to Science, then, and what I will call Gelman’s Law (although Gelman himself does not refer to it that way). 

Most non-academics I know view academics and their research with a somewhat rosy glow. If someone with letters after their name writes something, and particularly if they write it in an academic journal, they believe it. 

It does nothing to increase my popularity with my friends to repeatedly tell them: it ain’t so. There is a lot of crappy (a technical academic term, I will elaborate in future posts) research being done, and a lot of crappy research being published, even in peer-reviewed journals. What is worse is that as far as I can tell, the credible research is almost never the stuff that gets written up in the media. Some version of Gresham’s Law [‘bad money drives out good money’] seems to be at work here. 

A blog that I read regularly is titled Statistical Modeling, Causal Inference and Social Science (gripping title, eh?), written by Andrew Gelman, a Political Science and Stats prof at Columbia U. I recommend it to you, but warn that you better have your geek hard-hat on for many of the posts. 

Although I often disagree with Gelman, he generally writes well and I have learned tons from his blog. One of the things that has endeared it to me is his ongoing campaign against academic fraud and incompetent research. 

He has formulated a Law of his own, which he modestly attributes to Clarke, but which I will here dub Gelman’s Third Law: 

“Any sufficiently crappy research is indistinguishable from fraud.”

I think this law combines the insights of Clarke’s and Grey’s. The consequences of believing the results from crappy research do not differ from the consequences of believing the results from fraudulent research, as with Grey. However, it is also true that there is no reason to see the two things as different. If you are so incompetent at research as to produce crap, then you should be seen as a fraud, as with Clarke. 

I will be writing about crappy/fraudulent research often here, in hopes of convincing readers that they should be very skeptical the next time they read those deadly words: “Studies show…”

I will close this by referring you, for your reading pleasure, to a post by Gelman titled:    

 It’s bezzle time: The Dean of Engineering at the University of Nevada gets paid $372,127 a year and wrote a paper that’s so bad, you can’t believe it.

It’s a long post, but non-geeky, and quite illuminating. (Aside: I interviewed for an academic position at U of Nevada in Reno a hundred years ago. They put me up in a casino during my visit. Didn’t gamble, didn’t get a job offer.) You can read more about this intrepid and highly paid Dean here. His story is really making the (academic) rounds these days. 

You’re welcome, and stay tuned. I got a million of ‘em….

p.s. Discovered this since I wrote the above, but before posting. One of many reasons this stuff matters, from Nevada Today

University receives largest individual gift in its history to create the George W. Gillemot Aerospace Engineering Department 

The $36 million gift is the largest individual cash gift the University has received in its 149-year history 

Anyone care to bet on whether this Dean gets canned?

 Corrigendum: An alert reader has pointed out that Clarke’s novel was not written in 1982 – indeed, the film came out in 1968. In fact the 2001 film was based largely on one of Clarke’s short stories from 1951: The Sentinel. Clarke did write a novel called 2010: Odyssey Two, in 1982, and a not-so-successful movie was based on that, in 1984.