Slotting Allowances and Manufacturers' Retail Sales Effort

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.