The Economics of Slotting Contracts

34 Pages Posted: 9 Jul 2011  

Joshua D. Wright

George Mason University - Antonin Scalia Law School, Faculty

Benjamin Klein

University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

Abstract

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.

JEL Classification: L42, K21

Suggested Citation

Wright, Joshua D. and Klein, Benjamin, The Economics of Slotting Contracts (2007). Journal of Law and Economics, Vol. 50, August 2007. Available at SSRN: https://ssrn.com/abstract=1657214

Joshua D. Wright

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

Benjamin Klein (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

1999 Avenue of the Stars
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Los Angeles, CA 90067-4628
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HOME PAGE: http://www.econ.ucla.edu/people/Faculty/Klein.html

Compass Lexecon ( email )

1999 Avenue of the Stars
Suite 1150
Los Angeles, CA 90067-4628
United States
310-728-2025 (Phone)
310-728-2070 (Fax)

HOME PAGE: http://www.compasslexecon.com/professionals/bio?id=152

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