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

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Author Info

  • Akshay R. Rao

    ()
    (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

  • Humaira Mahi

    ()
    (Eli Broad Graduate School of Management, Michigan State University, Lansing, Michigan 48824)

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    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 activitiesare 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.

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    File URL: http://dx.doi.org/10.1287/mksc.22.2.246.16035
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 22 (2003)
    Issue (Month): 2 (January)
    Pages: 246-268

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    Handle: RePEc:inm:ormksc:v:22:y:2003:i:2:p:246-268

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    Related research

    Keywords: Slotting Allowances; Information Asymmetry; New Product Introductions; Retail Food Industry;

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    Cited by:
    1. Sinha, Piyush Kumar & Gupta, Suraksha & Rawal, Saurabh, . "Brand Adoption by BoP Retailers," IIMA Working Papers WP2014-03-08, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Geng, Qin & Minutolo, Marcel C., 2010. "Failure fee under stochastic demand and information asymmetry," International Journal of Production Economics, Elsevier, vol. 128(1), pages 269-279, November.
    3. Oystein Foros & Hans Jarle Kind, 2006. "Do Slotting Allowances Harm Retail Competition?," CESifo Working Paper Series 1800, CESifo Group Munich.
    4. Oystein Foros & Hans Jarle Kind & Jan Yngve Sand, 2008. "Slotting Allowances and Manufacturers’ Retail Sales Effort," CESifo Working Paper Series 2396, CESifo Group Munich.
    5. Innes, Robert & Hamilton, Stephen F., 2006. "Naked slotting fees for vertical control of multi-product retail markets," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 303-318, March.
    6. Gabrielsen, Tommy Staahl, 2005. "Slotting Allowances and Buy-Back Clauses," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24580, European Association of Agricultural Economists.
    7. Chyi-Mei Chen & Shan-Yu Chou & Lu Hsiao & I-Huei Wu, 2009. "Private labels and new product development," Marketing Letters, Springer, vol. 20(3), pages 227-243, September.

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