IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Multiple Messages to Retain Retailers: Signaling New Product Demand

  • Preyas S. Desai

    ()

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708-0120)

Registered author(s):

    With the increase in new product introductions in consumer packaged goods categories, supermarkets are reluctant to accept new products. Therefore, it is very important for manufacturers to convince retailers of the high-demand potential of their products. We study how a high-demand manufacturer can use advertising, slotting allowances, and wholesale prices to signal its high demand to retailers. Specifically, we examine the relative importance of advertising and slotting allowance in signaling demand. That is, when is it optimal for the manufacturer to use high advertising support, and when is it optimal for it to offer slotting allowance as a signal of its demand? We show that when a high-demand manufacturer is trying to signal its demand to retailers, advertising and slotting allowance are partial substitutes of one another in the sense that the manufacturer can increase one in order to compensate for a reduction in the other. We find that the high-demand manufacturer's signaling strategy depends on three factors: the retailer's stocking costs, the intensity of retail competition, and the advertising response rate in the given product market. We begin with a model of one manufacturer dealing with one retailer. The manufacturer has private information about the potential demand for its new product. The retailer is uncertain about the likely demand of the new product and is willing to accept the product only if it is convinced that the demand is high. We characterize the high-demand manufacturer's separating equilibrium strategies. We find that the slotting allowance plays an important role in signaling when the retailer's stocking costs are high and the advertising effectiveness is low. On the other hand, the manufacturer does not offer any slotting allowance, and advertising plays a bigger role when the stocking costs are low or the advertising effectiveness is high. We then examine the effects of retail competition on the manufacturer strategy. We find that the slotting allowance plays a more important role when the retail level competition is very intense. The manufacturer may have to offer a positive slotting allowance even in the absence of retailers' demand uncertainty when the retail competition is sufficiently intense. This result shows that the slotting allowance may have an important role to play even in the absence of signaling or screening considerations. Thus, our analysis of competitive setting provides an alternative explanation for slotting allowances. It also offers support to the views of many retailers who believe that slotting allowances can help retailers recover high stocking costs in highly competitive retail markets. In the presence of retailers' demand uncertainty, the manufacturer offers a higher slotting allowance in order to signal its high demand. We also investigate the effect of retailer's uncertainty about the effectiveness of the manufacturer's advertising. We show that if the high-demand manufacturer also has a higher advertising response rate, the manufacturer provides even higher advertising support to alleviate the retailer's advertising-related uncertainty. By increasing the advertising support, the manufacturer credibly tells the retailer; that it would not be optimal for the manufacturer to provide such high advertising support unless it had high enough advertising effectiveness.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://dx.doi.org/10.1287/mksc.19.4.381.11793
    Download Restriction: no

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 19 (2000)
    Issue (Month): 4 (August)
    Pages: 381-389

    as
    in new window

    Handle: RePEc:inm:ormksc:v:19:y:2000:i:4:p:381-389
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Sullivan, Mary W, 1997. "Slotting Allowances and the Market for New Products," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 461-93, October.
    2. Greg Shaffer, 1991. "Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 120-135, Spring.
    3. Martin A. Lariviere & V. Padmanabhan, 1997. "Slotting Allowances and New Product Introductions," Marketing Science, INFORMS, vol. 16(2), pages 112-128.
    4. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
    5. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    6. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
    7. Preyas S. Desai & Kannan Srinivasan, 1995. "Demand Signalling Under Unobservable Effort in Franchising: Linear and Nonlinear Price Contracts," Management Science, INFORMS, vol. 41(10), pages 1608-1623, October.
    8. Kannan Srinivasan, 1991. "Multiple Market Entry, Cost Signalling and Entry Deterrence," Management Science, INFORMS, vol. 37(12), pages 1539-1555, December.
    9. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:19:y:2000:i:4:p:381-389. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.