Do Slotting Allowances Enhance Efficiency or Hinder Competition?

Slotting allowances are lump-sum payments by manufacturers to retailers for stocking new products. The economic rationale for slotting allowances is controversial. Supporters argue that slotting allowances are efficiency enhancing; critics argue that they are anticompetitive. However, there is no empirical research on this issue because of the difficulty in obtaining data about these transactions. Using data on all new products that were offered to one retailer for a period of nine months, the authors empirically investigate support for the alternative rationales for slotting allowances. The analysis indicates that, in general, there is more support for the efficiency theories than for the anticompetitive theories. The authors find that slotting allowances (1) efficiently allocate scarce retail shelf space, (2) help balance the risk of new product failure between manufacturers and retailers, (3) help manufacturers signal private information about potential success of new products, and (4) widen retail distribution for manufacturers by mitigating retail competition. The authors find little support for the anticompetitive rationales in the data. The empirical support for the efficiency rationales suggests that the Federal Trade Commission was correct in being circumspect about banning slotting allowances outright.

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