Why is fuel more expensive on the high way in Europe?

Question

In Europe it's usual, that fuel prices are 10-20% higher on the highway, than in the city. This is not only my personal observation, but also mentioned on travel sites (eg here and here). I don't have much expertise in economics, but as I understand this should not be possible in a competitive market, since what would stop a petrol station to lower their prices to the same level as the ones in the city, and get all the customers?

One solution could be, that they are different companies, but even the big ones like Shell and OMV have higher prices on the highway.

My question is: what is the reason for this situation, and what stops petrol stations from lowering their prices?

Answer 1

Because there is no indication in your question that you are a student or practitioner of economics, I am writing an answer for a lay audience. Let me know if you would like more technical detail.

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A fairly general prediction from economic models of competition between firms is that the price that maximises their profit is higher the less sensitive is demand to that price (this sensitivity is measured by the "price-elasticity of demand"). Intuitively:

• if demand is very sensitive to price then a cut in price will cause demand to increase a lot. The firm receives less for each unit it sells, but sells very many more units and is better-off overall.
• if demand is not sensitive to price then the firm can increase price without causing its sales to fall very much and will therefore wish to do so.

There are lots of things that affect the sensitivity of demand. One example, as DornerA mentioned in a comment, is geographic location. If the nearest competing seller is very far away or inconveniently located then buyers will be reluctant to shop elsewhere, meaning their demand is likely to be less sensitive to price increases at locations that are geographically isolated in some way. This seems like a reasonable way to think of highway fuel stations.

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A little thought should convince you that the same principle (that prices are higher when demand is less sensitive) holds for other cases where demand is price-insensitive too. For example:

• why is food so expensive on trains/airplanes?
• why are branded goods more expensive than generic ones?
• why are the photographs from theme park rides so expensive?
• etc.

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Edit: A comment by AndrejaKo reminds me to add that the other very common reason why firms might increase their price is that they have higher costs. However, economics theory predicts that only unit costs (i.e. those that increase when you sell more units) matter for optimal pricing. Thus, for example, the fact that land near a highway is expensive would not seem like a very convincing explanation for high fuel prices (because the land costs the same regardless of how many units of fuel are supplied). But if, for some reason, supplying each litre of fuel was more expensive at highway fuel stations (because, for example, transporting the fuel there is more expensive) then we would indeed have an explanation for higher highway fuel prices.

Answer 2

There are two separate groups of customers for fuel: private individuals and commercial businesses.

The drivers of most vehicles used for business are not paying for the fuel themselves, so they are more influenced by the convenience of using fuel stations that are easy to find and are on the routes that they are already driving - i.e. on main roads.

In the UK, fuel prices are often higher on motorways than on other main roads, because commercial drivers using a motorway for high speed journeys are not going to waste time by leaving the motorway to buy fuel and then returning to it.

On the other hand private individuals are more likely to search out cheap fuel, especially if they can buy it easily while making some other car journey.

That explains why in the UK, the large supermarket chains sell relatively cheap fuel compared with "main road" prices. Most private motorists regularly visit supermarkets by car to shop, and while they are there it is convenient to buy fuel as well. The supermarket needs a large area of land for the store itself and for car parking, and the extra space needed for a fuel station is small. They can offset the reduced profit margin from their cheaper fuel price by the increase in sales volume, and encourage customer loyalty by including fuel sales on their store loyalty cards and similar promotional offers.

Incidentally, non-commercial professional drivers sometimes do search out cheap fuel. At my local supermarket, it's quite common to see a police car, and sometimes even an ambulance, filling up at the pumps.

Answer 3

Convenience premium.

The market prices in a premium for convenience. This explains why hot dogs cost more inside the ballpark than at the convenience store outside the ballpark. And why convenience store goods cost more than those sold at the supermarket.

Put another way: Part of the cost of an item is not just the cost of materials and labor to get it there, but there is also a cost of availability. In other words, when you don't purchase the gas on the highway, the cost of it being available there is still present. Which you pay when you buy.

Note: This answer agrees with the price elasticity explanation given by @Ubiquitous but avoids the price elasticity concept in favor of the perhaps more lay concept of convenience premium.

Answer 4

Many economists like to assume perfect information but that is not reality.

A long distance traveler is unlikely to have information on which petrol stations are cheapest in the area. They will have a vague idea that petrol stations off the highway are likely to be cheaper but they also know that leaving the highway and driving around town looking for cheap fuel will burn time and fuel.

Therefore the petrol stations that serve travelers can get away with charging a premium over the "going rate" (those on main roads and especially motorways).

Of course there is a limit, the traveler will probably have some idea what the going rate for fuel is and a threshold over which they will say "screw that"

A local in most areas has much better information, they will probably have a familiarity with most of the local petrol stations and will usually have a choice of several alternatives. So to keep their customers petrol stations that serve locals generally have to sell the petrol at barely above cost.

Answer 5

Two possible reasons:

1. There is higher demand on the highway.

People on the highway are willing to pay more to stay on the highway (leaving to find another gas station will take time, they might not be familiar with the area, or other reasons). Since they're willing to pay more, the gas stations charge more.

2. Lowering prices might not increase profit.

Lowering the price might increase the quantity of gas or petrol sold, but it might not increase the quantity enough relative to the decrease in price. For example, dropping the price by 10% might only increase the amount of gas sold by 5%. Your overall revenue would decrease.