In economics 101, we are taught that the intersection between the supply & demand curve gives an equilibrium market price that’s broadly good for all.

We see this all the time with airlines and hotel bookings where prices vary significantly between peak and off season times.

Companies test the elasticity of demand for their products by increasing prices of their product. If the increase in price doesn’t reduce the demand - that becomes the new equilibrium. Conversely, increase the price too much and demand might drop.

There are exceptions to this rule and such products are called Veblen goods. Luxury items like watches fall in this category.

From the supply / demand curve, emerges the concept of consumer surplus & producer surplus.

Consumer surplus means that a customer when buying an item at the equilibrium price perceives the values of that product to be higher than that. This means he/she feels satisfied about paying for it. This is also sometimes called “value for money”.

Producer surplus means that the company is able generate profit for themselves by selling at that price.

This interplay between consumer surplus & producer surplus is a sign of free market economy. Companies that do amazing well in the long term generate both high producer & consumer surplus.

Usually, this is done for the consumer / market as a whole.

However, today, a lot of consumer facing tech companies try to find the highest price they can charge at a per consumer level.

They’ll charge higher if a customer is using an iPhone or travelling to a high end restaurant in a cab. Companies call this “surge pricing” and hide all the price manipulation behind it.

This means that such companies are eating into the consumer surplus and trying to extract the majority value for themselves.

I don’t know any consumer that would be happy to know that they paid a higher price for the exact same good at around the same time when compared to others. I definitely feel cheated whenever it happens to me.

I think that a product with a strong market fit doesn’t require such fancy mathematics.

Instead, this effort should be put back into making the product better and increase consumer surplus. This will ultimately lead to a higher producer surplus / profit for the business in the long term.