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The Economics of Slotting Contracts

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  • Benjamin Klein
  • Joshua D. Wright

Abstract

Slotting fees, per-unit-time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental individual manufacturer sales without drawing customers from competing stores. In these circumstances, retailer and manufacturer incentives do not coincide with regard to the provision of promotional shelf space, and manufacturers must enter shelf space contracts with retailers. Retailers are compensated for supplying promotional shelf space at least partially with a per-unit-time slotting fee when interretailer price competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting contracts in grocery retailing.

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 50 (2007)
Issue (Month): ()
Pages: 421-454

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Handle: RePEc:ucp:jlawec:v:50:y:2007:p:421-454

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Web page: http://www.journals.uchicago.edu/JLE/

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Cited by:
  1. Oystein Foros & Hans Jarle Kind & Jan Yngve Sand, 2008. "Slotting Allowances and Manufacturers’ Retail Sales Effort," CESifo Working Paper Series 2396, CESifo Group Munich.
  2. D. Johnsen, 2009. "The Ethics of “Commercial Bribery”: Integrative Social Contract Theory Meets Transaction Cost Economics," Journal of Business Ethics, Springer, vol. 88(4), pages 791-803, October.
  3. Pio Baake & Vanessa Schlippenbach, 2014. "The Impact of Upfront Payments on Assortment Decisions in Retailing," Review of Industrial Organization, Springer, vol. 44(1), pages 95-111, February.
  4. Wang, Jian-Cai & Lau, Amy Hing-Ling & Lau, Hon-Shiang, 2012. "Practical and effective contracts for the dominant retailer of a newsvendor product with price-sensitive demand," International Journal of Production Economics, Elsevier, vol. 138(1), pages 46-54.
  5. Mikhael Shor, 2008. "An experiment on strategic capacity reduction," Working papers 2012-22, University of Connecticut, Department of Economics.
  6. Jeanine Miklós‐Thal & Patrick Rey & Thibaud Vergé, 2011. "Buyer Power And Intrabrand Coordination," Journal of the European Economic Association, European Economic Association, vol. 9(4), pages 721-741, 08.
  7. Adam Rennhoff, 2010. "The Consequences of “Consideration Payments”: Lessons from Radio Payola," Review of Industrial Organization, Springer, vol. 36(2), pages 133-147, March.
  8. Rajagopalan, S. & Xia, Nan, 2012. "Product variety, pricing and differentiation in a supply chain," European Journal of Operational Research, Elsevier, vol. 217(1), pages 84-93.
  9. Kuo, Chia-Wei & Yang, Shu-Jung Sunny, 2013. "The role of store brand positioning for appropriating supply chain profit under shelf space allocation," European Journal of Operational Research, Elsevier, vol. 231(1), pages 88-97.
  10. Adam D. Rennhoff, 2009. "The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola," Working Papers 200904, Middle Tennessee State University, Department of Economics and Finance.

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