Revealed preference - motorists choose to pay sky-high motorway petrol prices

Politicians of almost all persuasions have an irresistible urge to meddle. The latest example is the fanfare orchestrated just before Easter by Chris Grayling, the Transport Secretary. He wrote to the Competition and Markets Authority (CMA) about the price of fuel at motorway service stations.

Grayling called for the UK's three biggest operators - Moto, Welcome Break and RoadChef  - to be investigated.  He was concerned that the prices charged at motorway forecourts might “exploit” the motorist.  There is, he pointed out in a flash of genius, less choice and competition on motorways than on other roads. 

Prices certainly are higher on the motorway, a recent industry survey showing an average of 137.7p a litre compared to a UK average of 120.1p.

We have been here before.  Only five years ago, in 2013, the CMA, then called the Office of Fair Trading, carried out a similar investigation.

Of course, action had to follow to justify the study, and the OFT duly called for increased information to be supplied to motorists.  Drivers, the OFT claimed, were unaware of the prices until they approached a service station, so special signs should let them know in advance.

But a trial run of the signs found that they made no difference at all to behaviour, and the plan was scrapped.

The concept that consumers have insufficient information to make a rational choice is a key theme in a great deal of regulatory activity. 

It goes back to the work of Nobel Laureates George Akerlof and Joe Stiglitz in the 1970s on imperfect information.  Until then, economic theory had been based on the assumption that consumers had full information about the attributes, such as price and quality, of the alternative choices available to them in any given situation.

Akerlof and Stiglitz introduced the related idea of “asymmetric information”.  Economists love grandiose phrases.  But this simply means that different agents may have different amounts of information.  In the case of fuel prices, the forecourt operator knows the high prices which are charged, but motorists might not.

Regulation, on this view, is needed to increase information to consumers, so that everyone can live in the world of the economics textbook. Choices can be made with full information. 

Ironically, economics, the discipline which studies free markets, has provided the intellectual rationale for much of the massive increase in regulatory activity which we have seen in recent decades.

With fuel prices, motorists clearly know already that motorway fuel is more expensive.  That is why the signs about this had no effect on their actions.  They have full information.

Another fundamental concept in economics is revealed preference.  People reveal their preferences not by filling in surveys, but by their actions.  Motorists choose to start a long journey knowing they will need fuel en route.  They choose to put fuel in at motorway services rather than divert off for cheaper fuel – information which is now readily available on satnavs. 

Grayling got some cheap headlines, but basic economic theory shows that his call is unwarranted.