The Economics of Slotting Contracts
Joshua D. Wright
Federal Trade Commission; George Mason University School of Law
University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon
Journal of Law and Economics, Vol. 50, August 2007
Slotting fees, per-unit-time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental individual manufacturer sales without drawing customers from competing stores. In these circumstances, retailer and manufacturer incentives do not coincide with regard to the provision of promotional shelf space, and manufacturers must enter shelf space contracts with retailers. Retailers are compensated for supplying promotional shelf space at least partially with a per unit-time slotting fee when inter-retailer price competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting contracts in grocery retailing.
Number of Pages in PDF File: 34
JEL Classification: L42, K21
Date posted: July 9, 2011
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