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
Date Written: September 12, 2019
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: Suggested Citation