Vertical Contracts with Endogenous Product Selection: An Empirical Analysis of Vendor-Allowance Contracts

81 Pages Posted: 9 Jan 2020 Last revised: 28 Mar 2022

See all articles by Sylvia Hristakeva

Sylvia Hristakeva

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: November 15, 2019

Abstract

Producers frequently provide retailers with financial incentives to secure distribution of their products. These payments often take the form of vendor allowances: lump-sum transfers to retailers that do not directly depend on quantity sold. First, I introduce an estimation strategy that uses observed product selections to inform us about lump-sum payments. I use retailers’ replacement threats, which may allow them to capture both vendor transfers and lower wholesale prices. Results imply that replacement threats influence equilibrium prices and total surplus in addition to the split in profits between upstream and downstream firms. A counterfactual restricts firms to only contract on wholesale prices. Results show that vendor allowances may have not only (negative) product distortion effects but also (potentially positive) pricing effects.

Suggested Citation

Hristakeva, Sylvia, Vertical Contracts with Endogenous Product Selection: An Empirical Analysis of Vendor-Allowance Contracts (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3506265 or http://dx.doi.org/10.2139/ssrn.3506265

Sylvia Hristakeva (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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