Surge pricing takes place when a service provider

Surge pricing is a specific form of dynamic pricing where a service provider increases prices in real-time when demand for a service significantly exceeds the available supply. Unlike broader dynamic pricing, which can involve both price increases and decreases, surge pricing specifically refers to upward adjustments triggered by sudden spikes in customer interest or limited resource availability. This mechanism is commonly utilized by ride-hailing services and SaaS companies to balance market dynamics. Economically, when demand outstrips supply, an 'excess demand' situation is created [2]. Raising prices during these periods serves two primary functions: it manages excessive demand by discouraging price-sensitive consumers and incentivizes more service providers to enter the market, thereby restoring equilibrium [2]. This strategy ensures efficient resource allocation during peak times or emergencies.

Sources

1. [1] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > Chapter 5 > p. 72
2. [2] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > Chapter 5 > p. 88