A recent survey by TravelSupermarket.com discovered that a family of 4 could be paying almost £29 for a basic lunch (sandwich, crisps, a chocolate bar and a drink) at a service station.

A 500ml of bottle water costs £1.27 on average at a motorway service station whereas it is 25p in an Asda supermarket. For a sausage roll it is 40p in Asda and the equivalent costs £2.30 at a service station.

Is this an example of price discrimination or do service stations simply have much higher costs that they have to pass on?

Obviously motorway service stations don’t benefit from the economies of scale that supermarkets do, for a start the shop itself is smaller, meaning it has much less shelf space and may even have higher labour costs, as staff will need to be compensated for travelling further to work. They might even have higher land costs if it is difficult to obtain planning permission to build such sites (despite the lower value of land in the middle of nowhere). So it would make sense for them to charge more to reflect these increased costs.

However to an extent they could be seen as price discriminating as they have quite an inelastic demand curve, due to their stronger market power. On a stretch of motorway they usually have a monopoly. That is, there aren’t many places one can stop off to purchase snacks, therefore there demand curve will be inelastic. Also people could have brought snacks with them on their car journey but seeing as they didn’t they obviously don’t mind paying a premium by stopping off at a service station. This allows the service stations to exploit the inelastic demand of its customers and charge a premium on its price.