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Slotting Allowances as Real Options: An Alternative Explanation

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  • Timothy J. Richards

    (Arizona State University)

Abstract

This article offers an alternative explanation for slotting allowances using contingent claims analysis, or real option pricing. Slotting allowances arise because retailers hold call options on their shelf space while suppliers must buy these options to introduce a new product. A simulated model of new-product introduction shows that stocking a new product contains a significant, imbedded real option component. We also show that advertising and promotional support can reduce the real option value.

Suggested Citation

  • Timothy J. Richards, 2004. "Slotting Allowances as Real Options: An Alternative Explanation," The Journal of Business, University of Chicago Press, vol. 77(4), pages 675-696, October.
    • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:675-696
    DOI: 10.1086/422436
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    Cited by:

    1. 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.
    2. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    3. Bronnenberg, Bart, 2018. "Innovation and Distribution: A General Equilibrium Model of Manufacturing and Retailing," CEPR Discussion Papers 13058, C.E.P.R. Discussion Papers.
    4. Alessandro Bonanno & Carlo Russo & Luisa Menapace, 2018. "Market power and bargaining in agrifood markets: A review of emerging topics and tools," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 6-23, December.
    5. 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.

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