Slotting Contracts and Consumer Welfare

Abstract:     
Slotting contracts involve manufacturer payments to retailers for shelf space. Slotting contracts are an important part of the competitive process in many product markets. While slotting contracts have been the subject of congressional hearings, agency investigations, antitrust litigation, and scholarly debate, very little is known about their competitive consequences. This article analyzes military commissary sales before and after a natural experiment in which commissaries ceased to accept slotting payments. This natural experiment provides a rare opportunity to directly observe the crucial policy counterfactual: would a prohibition on slotting contracts increase consumer welfare? This analysis measures the impact of slotting, at both the product and category levels, on prices, output, and product variety. The results are inconsistent with anticompetitive theories of slotting contracts. Slotting contracts are primarily associated with brand-shifting of sales within a product category, but not increases in category level prices or a reduction in category output or variety. To the extent that slotting contract revenue is passed on to consumers in competitive retail markets, an assumption generally warranted in the grocery retail industry, the results imply that slotting contract competition is likely to benefit consumers.

Number of Pages in PDF File: 43

Keywords: slotting allowances, vertical restraints, natural experiment, shelf space, exclusive dealing

JEL Classification: L41, L42, L44, L66, L81

Accepted Paper Series