Slotting Allowances and Manufacturers’ Retail Sales Effort
A manufacturer’s incentives to undertake non-contractible 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 non-contractible sales effort is relatively large. At odds with this, The Federal Trade Commission, among others, reports that slotting allowances are more commonly used for product categories where the scope for non-contractible effort by themanufacturer 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 the market observations. In particular, we show that even a retailer with completebargaining power may actually find it optimal to pay the manufacturer a franchising fee if demand is highly sensitive to the manufacturer’s non-contractible sales effort. For productcategories where the scope for non-contractible effort is relatively small, on the other hand, we are more likely to see slotting allowances.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rubinstein, Ariel, 1979. "Equilibrium in supergames with the overtaking criterion," Journal of Economic Theory, Elsevier, vol. 21(1), pages 1-9, August.
- 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.
- Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172.
- 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.
- 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.
- �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.
- Martin A. Lariviere & V. Padmanabhan, 1997. "Slotting Allowances and New Product Introductions," Marketing Science, INFORMS, vol. 16(2), pages 112-128.
- Preyas S. Desai, 1997. "Advertising Fee in Business-Format Franchising," Management Science, INFORMS, vol. 43(10), pages 1401-1419, October.
- Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
- Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer, vol. 13(1), pages 57-84, April.
- 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.
- 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.
- Preyas S. Desai, 2000. "Multiple Messages to Retain Retailers: Signaling New Product Demand," Marketing Science, INFORMS, vol. 19(4), pages 381-389, August.
- 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.
- Richard J. Sexton & Mingxia Zhang, 1996. "A Model of Price Determination for Fresh Produce with Application to California Iceberg Lettuce," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(4), pages 924-934.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2396. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.