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

84 Pages Posted: 20 Sep 2019 Last revised: 17 Mar 2022

See all articles by Andres Elberg

Andres Elberg

PUC-Chile - School of Management

Carlos Noton

Dept of Industrial Engineering - University of Chile

Date Written: September 12, 2019

Abstract

We study trade allowances --a key component of the contracts between retailers and manufacturers-- using a novel panel dataset on allowance payments negotiated between a large retailer and its suppliers. The use of these instruments remains controversial with some practitioners and scholars arguing that they are efficiency-enhancing and others claiming that they are primarily associated to an increasing buyer power of retailers. We find that trade allowances are large in magnitude, are paid by the vast majority of suppliers --including both national brand and private label manufacturers-- and vary substantially over categories and, especially, across suppliers within categories. In addition, we find evidence of positive cross-category spillovers on negotiated allowances by multi-category suppliers. Consistently with the ``retail power view'', we find that larger suppliers tend to pay lower trade allowances, after controlling for a rich set of fixed effects and accounting for alternative explanations. We also find supportive evidence for some aspects of the ``efficient contracts'' view, although they are likely to play a less important role in quantitative terms.

Keywords: Allowances, Vertical Channel, Bargaining

JEL Classification: L14, L81, M31

Suggested Citation

Elberg, Andres and Noton, Carlos, What Do Trade Allowances look like? 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)

PUC-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/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
58
Abstract Views
1,464
rank
517,010
PlumX Metrics