What Drives Trade Allowances? New Evidence from Actual Payments to a Big-Box Retailer

44 Pages Posted: 20 Sep 2019

See all articles by Andres Elberg

Andres Elberg

Pontificia Universidad Católica de Chile - School of Management

Carlos Noton

Dept of Industrial Engineering - University of Chile

Date Written: September 12, 2019

Abstract

Over the last few decades, trade allowances -- non-price incentives provided by manufacturers to retailers -- have become increasingly pervasive in the retail sector. Despite their importance, unavailability of hard data on allowances has severely limited empirical work. We analyze a proprietary panel dataset containing trade allowances paid by manufacturers to a large retailer in Chile. We document that trade allowances are economically meaningful in magnitude (on average, 15% of gross supplier sales) and highly heterogeneous across suppliers and categories (standard deviation of 12%). Most variation in allowances occurs across suppliers within a product category, suggesting that the category-specific costs are unlikely to be a significant driver of these payments. Furthermore, we find that larger suppliers pay lower trade allowances and that suppliers pay higher allowances in categories with a stronger presence of retailer's private labels. These findings support the view that bargaining leverage drives trade allowances.

Keywords: Allowances, Vertical Channel, Bargaining

JEL Classification: L14, L81, M31

Suggested Citation

Elberg, Andres and Noton, Carlos, What Drives Trade Allowances? New Evidence from Actual Payments to a Big-Box Retailer (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3452974 or http://dx.doi.org/10.2139/ssrn.3452974

Andres Elberg (Contact Author)

Pontificia Universidad Católica de Chile - School of Management ( email )

Av. Vicuña Mackenna 4860
Santiago, RM 7820436
Chile

Carlos Noton

Dept of Industrial Engineering - University of Chile ( email )

Beauchef 851
Santiago, RM
Chile

HOME PAGE: http://www.dii.uchile.cl/~cnoton/

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