Hypothetical Case Study 2: monopoly high pricing

Economics of Regulation and Competition
For week 5
Hypothetical Case Study: monopoly high pricing
2005: Motorway services in Wales
NB. All details are fictional, and no reference is intended to any existing company or
person. This was first written some time ago, so it is interesting to see how low my
predictions were of fuel and other prices!
Some background
In the UK motorway service areas are strictly limited in number and are operated on a
franchise basis. Companies awarded the franchise have complete discretion over prices
to be charged, but they must remain open 24 hours and provide free toilets for all
In response to complaints of shoddy service, they have typically sublet parts of the site
to fast food chains such as McDonalds, Burger King, and Pizza Hut. Quality in the
main restaurant has improved but prices are reckoned to be high by UK standards.
The Welsh motorway does not (yet) exist. Wales is hilly and, apart from the area
around and to the West of Cardiff in the South, is sparsely populated and does not have
a very good reputation amongst food lovers. Recently Wales got its own National
This case arose out of the complaints of travellers on the motorway opened in 2003
across central Wales linking Holyhead and Cardiff. There is only one motorway
services on the winding, hilly, 180 mile road which forms the only direct transport link
between north and south Wales – since storms swept away the railway viaduct at
Towyn, near Aberystwyth, which is awaiting a decision by the European Regional
Infrastructure Commission in Frankfurt before it can be rebuilt. The services are
operated by WMS (Welsh Motorway Services), a wholly-owned subsidiary of (USowned) First Leisure Corporation of Indiana. The Board of WMS is largely British.
The main complaints have been high prices and, at peak times, long queues for food and
Nature of product – demand
Only a handful of people set out to visit motorway service areas as their primary
objective. Motorway services are primarily consumed along with travel. They include:
petrol stations
plus a variety of “free” services such as 2-hour parking, maps and toilets.
A recent survey undertaken by the Welsh Office showed the average pattern of
behaviour at the mid-Wales service station:
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Economics of Regulation and Competition
For week 5
Table 1: Spending pattern of visitors to service station in the year 2005
Business Transport
Average parking time
45 mins
40 mins
60 mins
Average spending on:
Shopping &c.
Typical journey cost
Number if vehicles per day
These spending patterns include the 30% of visitors who use the services but spend
Leisure and business users mainly drive cars and multi-purpose vehicles (95% petrol
driven). Transport drivers drive a range of vehicles, from Tranisent vans to 8-axle, 60
tonne “Cobber” road trains. These transport vehicles are 95% diesel.
The market-prices
The Competition Commission commissioned a survey from a leisure consultancy, who
collected the following information on meal prices.
Table 2: Survey of Restaurant Prices
Type of restaurant
(‘A’ roads)
£5.00 £4.20
Fish and chips
£2.70 £2.40
4oz lamburger
Bacon and eggs
£2.70 n.a.
Welsh Rarebit
£1.20 £1.00
Tea (Pot for £1.00 £1.00
£0.65 £0.65
Roll and butter
(‘A’ roads)
Note : Fish and chips is a popular British restaurant dish. Welsh rarebit is melted cheese on toasted
Greasy spoon is colourful language for a cheap basic café.
Table 3: Fuel prices
£ per litre
Type of outlet
‘A’ road
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Economics of Regulation and Competition
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The market – costs
WMS’s cost structure is shown in the following Table. The site rent covers a charge for
depreciation and interest on the building costs incurred when the services were opened.
Annual Costs
Site rent (to group holding
Of which petrol station
Maintenance of common areas
Materials, etc.
Petrol station:
Total expenses (excluding
Site total
The market – revenues
WMS’s revenues are obtained largely from operation of the motorway service area.
Table 4: WMS Source of revenue
Views of Customers
Transport drivers noted that prices were twice as high as in typical transport cafés, and
20% higher than in typical English motorway service stations. The situation had been
improved slightly for regular drivers by the introduction of a loyalty card giving 20%
reductions once a minimum accumulated spending of £50 was triggered.
Other customers noted the isolation of the spot, but claimed this should mean that prices
should be lower, not higher.
A number of regular travellers said they had tried going off the motorway with limited
success “but everything seems to shut at 5.30 round here”.
Other customers were very pleased with the standard of service “at least when the place
isn’t too busy”.
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Economics of Regulation and Competition
For week 5
The Company’s views
The relevant market was motorway travel, of which motorway services were just one
input. The cost of the whole product should be looked at. Viewed in this way it was still
cheaper to travel down the Welsh motorway than to go via the northern coast road and
M5. More fuel would be required, more stops for food, and more time spent.
The service station operating company admitted that prices were higher than in
comparable restaurants on A roads, but claimed that this was the result of higher costs
arising from the need to open 24 hours and to provide toilet facilities to all comers,
whether they spent any money or not.
The situation in mid-Wales gave rise to further difficulties. Staff had to be bussed in
from as far away as 50 miles, and all food had to come along the motorway from
Cardiff. Because of this the standard contract was for 8 hour shifts, which made it
uneconomic to employ staff simply to cope with the 2 daily peaks, 7.30 – 9.30 am and
4.30 – 6.30 pm.
WMS claimed that the standard of service on the site was much better than at English
Motorway services. All customers were assigned a personal serving assistant, and,
except at peak times, the aim was to get the customers back on the road within 35
minutes of arrival in the restaurant.
Because or the superior ambience, price levels should be compared with a 4-crest hotel,
such as in the new Vaderbuilt Plaza chain.
The company denied they had a monopoly. Nobody forces people to use the facilities.
Drivers could fill up before the start of their journal, and could take food with them:
indeed, a recent survey showed that as many as 20% of visitors brought food with them
to eat in their vehicles, twice the figure of English motorways.
Those who patronised the café, therefore, had to subsidise these others, since the licence
terms did not permit charges for short-term parking or use of toilet facilities, on grounds
of road safety and public health.
The company offered a “back to basics” range of items, including tea, coffee, and
simple snacks which the company believed were competitively priced.
Another example of competition was in diesel prices. Commercial drivers were well
aware of price differences, and their vehicles had longer ranges than domestic vehicles.
If prices were too high, these drivers would fill up before their journey started.
The site was only marginally profitable – profits were only 1.4% of turnover – so it was
difficult to see how the service area could afford to reduce any of its prices, unless
service standards were allowed to fall.
The views of other parties
The chairman of the Eat’n’Go chain, Mr Dicky Bramsgrove, said they had tried to
establish “just-off-the-Motorway services” to gain economies of scope from serving
both local and long-distance travellers, but had faced difficulties from the planning
authorities, particularly in National Park areas. Unlike in America it was difficult to
advertise “off-the-motorway services”, so they had reluctantly abandoned the idea.
City University
Economics of Regulation and Competition
For week 5
Questions for consideration
1. What further information would you seek? (up to three items, in order of
2. What is the relevant market or markets? (Make explicit reference to substitutes.) Are
there separate segments within the market thus defined?
3. Are entry barriers significant? (What is their source?)
4. Is there dominance in this market?
5. Is there any evidence that prices are excessive?
6. Is there any evidence of price discrimination?
7. Is a remedy called for? If so, suggest some alternatives. Which do you prefer?
John Cubbin
City University