Slotting Allowances and Conditional Payments

We analyze the competitive effects of upfront payments made by manufacturers to retailersin a contracting situation where rival retailers offer contracts to a manufacturer. In contrast toBernheim and Whinston (1985, 1998), who study the situation in which competing manufacturersoffer contracts to a common retailer, we find that two-part tariffs (even if contingent onexclusivity or not) do not suffice to implement the monopoly outcome. More complex arrangementsare required to internalize all the contracting externalities. The retailers can for exampleachieve the monopoly outcome through (contingent) three-part tariffs that combine slotting allowances(i.e., upfront payments by the manufacturer) with two-part tariffs where the fees areconditional on actual trade. The welfare implications are ambiguous. On the one hand, slottingallowances ensure that no efficient retailer is excluded. On the other hand, they allow firms tomaintain monopoly prices in a common agency situation. Simulations suggest that the lattereffect is more significant.