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Research Note—The Effects of Costs and Competition on Slotting Allowances

  • Dmitri Kuksov


    (Washington University in St. Louis, One Brookings Drive, St. Louis, Missouri 63130-4899)

  • Amit Pazgal


    (Rice University, 6100 Main Street, Houston, Texas 77005)

Registered author(s):

    We consider the optimal two-part tariff contract between a manufacturer and a retailer. We show that retail competition (in the presence of either fixed costs or bargaining power) may lead to slotting allowances in an optimal contract, even with a monopoly manufacturer and no information asymmetry. On the other hand, slotting allowances do not arise with a monopoly retailer and no information asymmetry, whether the manufacturer is a monopoly or not. We also show that more intense retail competition, higher retail bargaining power, larger retailer fixed costs, lower marginal costs of retailing, as well as larger relative retailer size (whether coming from a location or operating advantage), have a positive impact on the incidence and the magnitude of slotting allowances. The opposing effects of the fixed and marginal operating costs on slotting allowances, as well as the impact of competition and bargaining power on profits, underscore the importance of careful definitions of these variables in empirical research.

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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 26 (2007)
    Issue (Month): 2 (03-04)
    Pages: 259-267

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    Handle: RePEc:inm:ormksc:v:26:y:2007:i:2:p:259-267
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    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.
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    11. Anne T. Coughlan & Birger Wernerfelt, 1989. "On Credible Delegation by Oligopolists: A Discussion of Distribution Channel Management," Management Science, INFORMS, vol. 35(2), pages 226-239, February.
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    13. Shaffer Greg, 2005. "Slotting Allowances and Optimal Product Variety," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-28, June.
    14. 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.
    15. 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.
    16. Akshay R. Rao & Humaira Mahi, 2003. "The Price of Launching a New Product: Empirical Evidence on Factors Affecting the Relative Magnitude of Slotting Allowances," Marketing Science, INFORMS, vol. 22(2), pages 246-268, January.
    17. J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, vol. 17(2), pages 156-169.
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