The Economics of Slotting Contracts

52 Pages Posted: 9 Aug 2005  

Benjamin Klein

University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon

Joshua D. Wright

George Mason University - Antonin Scalia Law School, Faculty

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Abstract

Slotting fees, per unit time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental manufacturer sales without drawing customers from competing stores. In these circumstances retailers do not have the incentive to provide the joint profit maximizing amount of shelf space. Manufacturers compensate retailers for promotional shelf space with a per unit time slotting fee when inter-retailer competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting in grocery retailing.

Keywords: Slotting allowances, shelf space, vertical restraints, product placement

JEL Classification: L42, L81, K21

Suggested Citation

Klein, Benjamin and Wright, Joshua D., The Economics of Slotting Contracts. Journal of Law and Economics, August 2007; George Mason Law & Economics Research Paper No. 06-37; American Law & Economics Association Annual Meetings, 2005. Available at SSRN: https://ssrn.com/abstract=773464

Benjamin Klein

University of California, Los Angeles (UCLA) - Department of Economics ( email )

1999 Avenue of the Stars
Suite 1150
Los Angeles, CA 90067-4628
United States
310-728-2025 (Phone)
310-728-2070 (Fax)

HOME PAGE: http://www.econ.ucla.edu/people/Faculty/Klein.html

Compass Lexecon ( email )

1999 Avenue of the Stars
Suite 1150
Los Angeles, CA 90067-4628
United States
310-728-2025 (Phone)
310-728-2070 (Fax)

HOME PAGE: http://www.compasslexecon.com/professionals/bio?id=152

Joshua D. Wright (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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