Slotting Allowances: An Empirical Investigation

Slotting allowances are lump-sum payments by manufacturers for stocking new products. The economic rationale for slotting allowances is controversial. Several theoretical arguments have been provided for the use of slotting allowances. Some are based on efficiency considerations: (1) efficient allocation of scarce retail shelf space, (2) equitable allocation of new product failure risk between manufacturers and retailers and (3) signaling device for manufacturers to communicate private information about potential success to the retailer. Others have argued that slotting allowances are an anti-competitive device that (1) manufacturers use to reduce retail competition (2) large manufacturers use to exclude small manufacturers. Others suggest that slotting allowances are the result of retailers exercising power. However, empirical research has been virtually non-existent due to the difficulty in obtaining data about these transactions. Using data on all new products that were offered to one retailer for a period of six months, we empirically investigate support for the alternative rationales for slotting allowances. Our analysis indicates that broadly there is more support for the efficiency theories than for the anti-competitive theories. We find evidence that slotting allowances (1) serve to efficiently allocate scarce retail shelf space; (2) help balance the risk of new product failure between manufacturers and retailers; (3) help only large manufacturers communicate their private information about potential success of new products and (4) serve to widen retail distribution for manufacturers by mitigating retail competition.