What Do Trade Allowances look like? Evidence from Actual Payments to a Big-Box Retailer

Abstract

We document key features of trade allowances –a major component of the contracts between large retailers and manufacturers– using a unique panel dataset on allowance payments negotiated between two supermarket chains owned by a large retailer and its suppliers over a two-year period. We show that trade allowances are large in magnitude, are paid by the vast majority of suppliers, and vary substantially over categories and, especially, across suppliers within categories. We further study trade allowance behavior along key dimensions of the manufacturer-retailer relationship. First, we report important interdependencies between allowances paid by multicategory suppliers across different categories, suggesting that single-category analysis of manufacturer-retailer interactions may be misleading. Second, we show that dedicated private label manufacturers do pay allowances, and that dual branders (i.e., national brand manufacturers who, in addition, produce private labels) tend to pay lower allowances than fully national brand manufacturers. Third, we examine the relationship between allowance payments and price promotional activities and find that price and nonprice incentives tend to be treated as substitutes. Fourth, we document a positive relationship between allowance payments and prices, suggesting that trade allowances do not mitigate the double marginalization problem. Finally, the evidence suggests that both market power and efficiency aspects are at play in the explanation of trade allowances.