What Drives Trade Allowances? New Evidence from Actual Payments to a Big-Box Retailer
44 Pages Posted: 20 Sep 2019
Date Written: September 12, 2019
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: Suggested Citation