The Economics of Slotting Contracts
University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon
Joshua D. Wright
Federal Trade Commission; George Mason University School of Law
Journal of Law and Economics, August 2007
George Mason Law & Economics Research Paper No. 06-37
American Law & Economics Association Annual Meetings, 2005
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 manufacturer sales without drawing customers from competing stores. In these circumstances retailers do not have the incentive to provide the joint profit maximizing amount of shelf space. Manufacturers compensate retailers for promotional shelf space with a per unit time slotting fee when inter-retailer 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 in grocery retailing.
Number of Pages in PDF File: 52
Keywords: Slotting allowances, shelf space, vertical restraints, product placement
JEL Classification: L42, L81, K21
Date posted: August 9, 2005
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