The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances

Abstract

Slotting allowances are a relatively recent trend, particular to the retail food industry. These allowances are lump-sum, up-front transfer payments from manufacturer to retailer when the manufacturer launches a new product. The practice has attracted some scrutiny because of uncertainty about its purposes and consequences. We draw from the extant literature to identify factors that potentially influence the relative magnitude of slotting allowances. Based on analysis of primary survey data from retailers and manufacturers, we observe that charging and paying of slotting allowances are affected by the relative strength of the players. Among retailers, the relative magnitude of slotting fees increases with retailers' informational advantage over the manufacturer about the likely success of the new product, even when retailers recognize that the product is likely to be successful. Additionally, and consistent with the first finding, retailers with lower costs (i.e., potentially more efficient and powerful retailers) received higher slotting allowances. Furthermore, retailers charge higher slotting fees, even when concerns about manufacturers' fulfilling postlaunch advertising commitments are minimal, implying that relatively powerless manufacturers are asked to provide credible commitments regarding postlaunch activities and are asked to pay relatively high slotting fees. Among manufacturers, the relative magnitude of slotting fees paid is lower for those who have a strong market share position. We discuss the theoretical, managerial, and public policy implications of our findings.

Naked slotting fees for vertical control of multi-product retail markets

“…Indeed, the implicit rent transfer in such a contract can result in a negative bfeeQ for the monopolist-a payment made from the retailer to the monopolist-at the same time the fringe is charged a positive slotting fee. This is consonant with the heuristic empirical observation that larger manufacturers are less likely to pay slotting fees than are smaller ones (Freeman and Myers, 1987;Rao and Mahi, 2003;Sullivan, 1997, note 9). Nonetheless, as we discuss below, such asymmetry in the retail practice-and the attendant transparency of the contract's anti-competitive effect-is by no means necessary to achieve the integrated outcome.…”

“…However, it is at odds with what is rapidly becoming a stylized fact of the slotting fee debate-consternation by small wholesalers over the undesired imposition of slotting fees by large retailers (see Prevor, 2000, and many others). Therrien, 1989;Prevor, 2000;Rao and Mahi, 2003), then the anti-competitive conclusions of this paper may be of practical importance. The analysis developed in this paper has natural generalizations.…”

Pricing in Marketing Channels

“…However the results are inconclusive because retailers and manufacturers have somewhat opposing views. Rao and Mahi (2003) survey manufacturers and retailers about each transaction they were involved in. They find that slotting allowances increases with greater retailer power, but acknowledge that the results may be due to their inability to control for manufacturer-retailer power at the level of each transaction due to pooling transactions across a wide range of manufacturers and retailers.…”

Editorial: Consulting, Research, and Consulting Research

“…Researchers in marketing who seek a better understanding of information in UPC scanning data, the impact of slotting allowances, retailer pricing, and other marketing topics should also examine (in some detail) contemporary consulting activities and industry practice related to the corresponding topics (e.g., see Bucklin and Gupta 1999, Rao and Mahi 2003, and Shankar and Bolton 2004 for excellent analyses of actual industry practice).…”