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Paying for Shelf Space: An Investigation of Merchandising Allowances in the Grocery Industry

Listed author(s):
  • Rennhoff Adam

    (Middle Tennessee State University)

Registered author(s):

    Merchandising allowances are fees paid by manufacturers to retailers in order to encourage the allocation of in-store promotional activities to the manufacturers' brand. I use a three-stage game framework to formulate a vertical structural model, which endogenizes manufacturer, retailer, and consumer decisions in the presence of merchandising allowances. The model allows for non-linear vertical pricing contracts using merchandising allowances paid to retailers. This differs from previous work which has focused on franchise fees paid to manufacturers. The model is estimated using store-level weekly data from the ketchup industry. In addition to estimates of consumer taste parameters, the model also yields predictions of wholesale prices and the size (dollar value) of the merchandising allowances. Counterfactual simulations reveal that merchandising allowances lead to an increase in retail profits, a decline in manufacturer profits, a decline in consumer surplus, and reduction in total welfare.

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    Article provided by De Gruyter in its journal Journal of Agricultural & Food Industrial Organization.

    Volume (Year): 6 (2008)
    Issue (Month): 1 (October)
    Pages: 1-40

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    Handle: RePEc:bpj:bjafio:v:6:y:2008:i:1:n:9
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    1. Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2004. "Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," IDEI Working Papers 370, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2006.
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    6. Pradeep Chintagunta & Jean-Pierre Dubé & Vishal Singh, 2003. "Balancing Profitability and Customer Welfare in a Supermarket Chain," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 111-147, March.
    7. Ralph A. Winter, 1993. "Vertical Control and Price Versus Nonprice Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 61-76.
    8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    9. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    10. Villas-Boas, Sofia B & Hellerstein, Rebecca, 2006. "Identification of Supply Models of Manufacturer and Retailer Oligopoly Pricing," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9zh144zt, Department of Agricultural & Resource Economics, UC Berkeley.
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