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Slotting Allowances and Retailer Market Power

  • Hao Wang

    (China Center for Economic Research)

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.

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Paper provided by EconWPA in its series Industrial Organization with number 0411009.

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Length: 23 pages
Date of creation: 18 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpio:0411009
Note: Type of Document - pdf; pages: 23
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