Slotting Allowances and Optimal Product Variety

Abstract

Some commentators believe that slotting allowances enhance social welfare by providing retailers with an efficient way to allocate scarce retail shelf space. The claim is that, by offering their shelf space to the highest bidders, retailers act as agents for consumers and ensure that only the most socially desirable products obtain distribution. I show that this claim does not hold in a model in which a dominant firm and competitive fringe compete for retailer patronage. By using slotting allowances to bid up the price of shelf space, the dominant firm can sometimes exclude the competitive fringe even when welfare would be higher if the fringe obtained distribution.

Power in distribution channels — Supplier assortment strategy for balancing power

“…This is because the supplier knows everything that happens to the product prior to its placement on the store shelves: This setup resembles the slotting fees charged by several types of retailer as advance payments for agreeing to stock new products (Sullivan, 1997). From the research, slotting fees are seen as a way of improving distribution efficiency (Bloom et al, 2000;Sudhir and Rao, 2006;Foros et al, 2009), but also as a way for large retailers to abuse their power by forcing risk upon the manufacturers (Bloom et al, 2000;Shaffer, 2005;Foros and Jarle Kind, 2008). In this case, TimberSupplier has a clear incentive to replace low-volume products with more cost efficient ones.…”

Upfront Payments and Listing Decisions

“…The 1 For example, the German food industry launches about 150.000 products every year, while retail assortments consist merely of 6.200 to 30.000 products in average (see Lebensmittelzeitung 2005). Similar data for the U.S. is quoted by Sha¤er (2005). 2 Both the trade press as well as the academic literature have documented a shift of relative bargaining power in the grocery channel in favor of retailers (see Lariviere andPadmanabhan 1997, Sullivan 1997).…”

“…Slotting allowances can also be interpreted as a signaling (Kelly 1992, Chu 1992 Suppliers expecting their products to be successful on downstream markets are willing to pay higher slotting fees than those expecting their products to fail. Suppliers may also use upfront payments in order to raise rival's costs (Sha¤er 2005). Furthermore, there are several papers which explicitly focus on the competitive e¤ects of upfront payments imposed by retailers.…”

Consumer Shopping Costs as a Cause of Slotting Fees: A Rent-Shifting Mechanism

“…2 ; has no impact on whether the wholesale price is upward or downward distorted. It only a¤ects the extent of distortion (see (24)). The distortion of the wholesale price induces ine¢ ciencies which have to be compensated by the bene…t of shifting rent from the second supplier.…”