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Consumer Shopping Costs as a Cause of Slotting Fees: A Rent-Shifting Mechanism

Author

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  • Stéphane Caprice
  • Vanessa von Schlippenbach

Abstract

Analyzing a sequential bargaining framework with one retailer and two suppliers of substitutable goods, we show that slotting fees may emerge as a result of a rent-shifting mechanism when consumer shopping costs are taken into account. If consumers economize on their shopping costs by bundling their purchases, their buying decision depends rather on the price for the whole shopping basket than on individual product prices. This induces complementarities between the goods offered at a retail outlet. If the complementarity effect resulting from shopping costs dominates the original substitution effect, the wholesale price negotiated with the first supplier is upward distorted in order to shift rent from the second supplier. As long as the first supplier has only little bargaining power, she compensates the retailer for the upward distorted wholesale price by paying a slotting fee. We also show that banning slotting fees causes per- unit price to fall and welfare to increase.

Suggested Citation

  • Stéphane Caprice & Vanessa von Schlippenbach, 2010. "Consumer Shopping Costs as a Cause of Slotting Fees: A Rent-Shifting Mechanism," Discussion Papers of DIW Berlin 1012, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1012
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.357587.de/dp1012.pdf
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    Cited by:

    1. Heimeshoff, Ulrich & Klein, Gordon J., 2013. "Bargaining power and local heroes," DICE Discussion Papers 87, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

    More about this item

    Keywords

    Shopping costs; rent-shifting; slotting fees;

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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