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Slotting Allowances and Retailer Market Power

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  • Hao Wang

    (China Center for Economic Research)

Abstract

This paper uses a bilateral oligopoly model to study the slotting allowances in retailing industries. There are two symmetric manufacturers competing in the upstream market. In the downstream, there are a large retailer with considerable market share, and many small retailers with insignificant market shares. Suppose that only the large retailer is able to require slotting allowances. The retailers engage in price competition with spatial differentiation. The model suggests that the large retailer uses slotting allowances to capitalize its market power. By requiring slotting fees, the large retailer can raise the wholesale prices faced by the competing small retailers, and therefore lower their profit margins and market shares. The large retailer, on the contrary, achieves greater profit margins and market share. The lump sum part of the slotting fees is wholly bore by the manufacturers. But the slotting fees that are linear to the sales are actually bore by the competing small retailers and their customers. In this sense, requiring slotting allowance is an exclusionary strategy of the large retailer.

Suggested Citation

  • Hao Wang, 2004. "Slotting Allowances and Retailer Market Power," Industrial Organization 0411009, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:0411009
    Note: Type of Document - pdf; pages: 23
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/io/papers/0411/0411009.pdf
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    References listed on IDEAS

    as
    1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    2. Rennhoff, Adam D., 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Research Reports 25155, University of Connecticut, Food Marketing Policy Center.
    3. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-646, May.
    4. Adam D. Rennhoff, 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Food Marketing Policy Center Research Reports 084, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    5. Wujin Chu, 1992. "Demand Signalling and Screening in Channels of Distribution," Marketing Science, INFORMS, vol. 11(4), pages 327-347.
    6. 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 461-493, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Exclusionary strategy; Market power; Slotting allowance;

    JEL classification:

    • L - Industrial Organization

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