Surge pricing occurs when a service provider increases the price of its product or service in response to high demand and limited supply. This strategy is commonly employed by companies in the sharing economy, such as ride-hailing services and hotel booking platforms.

Option 1 correctly states that surge pricing involves raising prices when demand exceeds supply. This is done to incentivize consumers to reduce their demand or to encourage more service providers to join the market to meet the demand. By raising prices during peak times, service providers can optimize their revenue and allocate resources more effectively.

Option 2 is incorrect because surge pricing is not based on preset prices that are immune to demand and supply dynamics. On the contrary, surge pricing is specifically designed to respond to these dynamics and adjust prices accordingly.

Option 3 is also incorrect because surge pricing does not involve fixing a minimum price for services. Instead, it involves temporarily increasing prices above the normal rate.

Option 4 is incorrect because surge pricing is not based on fixing an average price over a day. Instead, it is a dynamic pricing strategy that takes place in real-time, responding to fluctuations in demand and supply.