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

  • 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)

Registered author(s):

    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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    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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    1. Martin A. Lariviere & V. Padmanabhan, 1997. "Slotting Allowances and New Product Introductions," Marketing Science, INFORMS, vol. 16(2), pages 112-128.
    2. 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.
    3. Ippolito, Pauline M, 1990. "Bonding and Nonbonding Signals of Product Quality," The Journal of Business, University of Chicago Press, vol. 63(1), pages 41-60, January.
    4. Montgomery, Cynthia A & Wernerfelt, Birger, 1992. "Risk Reduction and Umbrella Branding," The Journal of Business, University of Chicago Press, vol. 65(1), pages 31-50, January.
    5. P. M. Bentler & Chih-Ping Chou, 1987. "Practical Issues in Structural Modeling," Sociological Methods & Research, SAGE Publishing, vol. 16(1), pages 78-117, August.
    6. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
    7. Preyas S. Desai, 2000. "Multiple Messages to Retain Retailers: Signaling New Product Demand," Marketing Science, INFORMS, vol. 19(4), pages 381-389, August.
    8. Rao, Akshay R & Monroe, Kent B, 1996. "Causes and Consequences of Price Premiums," The Journal of Business, University of Chicago Press, vol. 69(4), pages 511-35, October.
    9. Rao, Akshay R & Bergen, Mark E, 1992. " Price Premium Variations as a Consequence of Buyers' Lack of Information," Journal of Consumer Research, Oxford University Press, vol. 19(3), pages 412-23, December.
    10. 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.
    11. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
    12. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-97, October.
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