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The Economics of Slotting Contracts


  • Benjamin Klein
  • Joshua D. Wright


Slotting fees, per-unit-time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental individual manufacturer sales without drawing customers from competing stores. In these circumstances, retailer and manufacturer incentives do not coincide with regard to the provision of promotional shelf space, and manufacturers must enter shelf space contracts with retailers. Retailers are compensated for supplying promotional shelf space at least partially with a per-unit-time slotting fee when interretailer price competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting contracts in grocery retailing.

Suggested Citation

  • Benjamin Klein & Joshua D. Wright, 2007. "The Economics of Slotting Contracts," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 421-454.
  • Handle: RePEc:ucp:jlawec:v:50:y:2007:p:421-454
    DOI: 10.1086/524125

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    References listed on IDEAS

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    Cited by:

    1. Pfeiffer, Thomas, 2016. "A comparison of simple two-part supply chain contracts," International Journal of Production Economics, Elsevier, vol. 180(C), pages 114-124.
    2. Johannes Paha, 2017. "Wholesale Pricing with Incomplete Information about Private Label Products," MAGKS Papers on Economics 201736, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Nakamura, Ryota & Pechey, Rachel & Suhrcke, Marc & Jebb, Susan A. & Marteau, Theresa M., 2014. "Sales impact of displaying alcoholic and non-alcoholic beverages in end-of-aisle locations: An observational study," Social Science & Medicine, Elsevier, vol. 108(C), pages 68-73.
    4. Wang, Jian-Cai & Lau, Amy Hing-Ling & Lau, Hon-Shiang, 2012. "Practical and effective contracts for the dominant retailer of a newsvendor product with price-sensitive demand," International Journal of Production Economics, Elsevier, vol. 138(1), pages 46-54.
    5. repec:eee:ecolet:v:158:y:2017:i:c:p:34-36 is not listed on IDEAS
    6. Adam D. Rennhoff, 2009. "The Competitive Effects of “Consideration Payments”: Lessons from Radio Payola," Working Papers 200904, Middle Tennessee State University, Department of Economics and Finance.
    7. Adam Rennhoff, 2010. "The Consequences of “Consideration Payments”: Lessons from Radio Payola," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(2), pages 133-147, March.
    8. Pio Baake & Vanessa Schlippenbach, 2014. "The Impact of Upfront Payments on Assortment Decisions in Retailing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(1), pages 95-111, February.
    9. Oystein Foros & Hans Jarle Kind & Jan Yngve Sand, 2008. "Slotting Allowances and Manufacturers’ Retail Sales Effort," CESifo Working Paper Series 2396, CESifo Group Munich.
    10. Lømo, Teis Lunde & Ulsaker, Simen Aardal, 2016. "Promotional allowances," Working Papers in Economics 08/16, University of Bergen, Department of Economics.
    11. Radaev, Vadim, 2014. "Time will tell? Medium-term effects of the use of the Trade Act," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 75-98, October.
    12. Mikhael Shor, 2008. "An experiment on strategic capacity reduction," Working papers 2012-22, University of Connecticut, Department of Economics.
    13. D. Johnsen, 2009. "The Ethics of “Commercial Bribery”: Integrative Social Contract Theory Meets Transaction Cost Economics," Journal of Business Ethics, Springer, vol. 88(4), pages 791-803, October.
    14. Rajagopalan, S. & Xia, Nan, 2012. "Product variety, pricing and differentiation in a supply chain," European Journal of Operational Research, Elsevier, vol. 217(1), pages 84-93.
    15. Kuo, Chia-Wei & Yang, Shu-Jung Sunny, 2013. "The role of store brand positioning for appropriating supply chain profit under shelf space allocation," European Journal of Operational Research, Elsevier, vol. 231(1), pages 88-97.
    16. Hamilton, Stephen & Innes, Robert, 2017. "Slotting allowances and retail product variety under oligopoly," Economics Letters, Elsevier, vol. 158(C), pages 34-36.
    17. Joshua D. Wright, 2010. "The Chicago School, Transaction Cost Economics, and Antitrust," Chapters,in: The Elgar Companion to Transaction Cost Economics, chapter 23 Edward Elgar Publishing.

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