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Slotting Allowances and Manufacturers’ Retail Sales Effort

  • Øystein Foros


    (Norwegian School of Economics and Business Administration, Helleveien 30, N-5045 Bergen, Norway)

  • Hans Jarle Kind


    (Norwegian School of Economics and Business Administration, Helleveien 30, N-5045 Bergen, Norway)

  • Jan Yngve Sand


    (University of Tromsø, Department of Economics and Management, N-9037 Tromsø, Norway)

A manufacturer’s incentives to undertake noncontractible investments depend on the profit margin on her sales to the retailer, and slotting allowances can facilitate such incentives by increasing unit wholesale prices. At first glance it is tempting to conclude that slotting allowances should be particularly prevalent for product categories where the manufacturer’s scope for undertaking noncontractible sales effort is relatively large. At odds with this, the Federal Trade Commission (FTC) among other organizations, reports that slotting allowances are more commonly used for product categories where the scope for noncontractible effort by the manufacturer is presumably relatively small. To scrutinize this puzzle we set up a simple model with one manufacturer and one retailer, where the manufacturer undertakes noncontractible demand-enhancing investments. The predictions from the model are consistent with market observations.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 76 (2009)
Issue (Month): 1 (July)
Pages: 266-282

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Handle: RePEc:sej:ancoec:v:76:1:y:2009:p:266-282
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  2. 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.
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  8. 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.
  9. Rao, Ram C & Srinivasan, Shubashri, 1995. "Why Are Royalty Rates Higher in Service-Type Franchises?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 7-31, Spring.
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  11. �ystein Foros & Hans Jarle Kind, 2008. "Do Slotting Allowances Harm Retail Competition?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 367-384, 06.
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