The Impact of Limited Retail Shelf Space on Category Management

Shelf space scarcity is a predominant aspect of the consumer goods industry. This paper analyzes its implications for category management. We consider two category management mechanisms: retailer category management, where the retailer determines product prices, and category captainship, where a manufacturer in the category is responsible for retail pricing. We develop a game-theoretic model of two competing manufacturers selling through the same retailer. The retailer behaves strategically and determines the category shelf space based on the profit potential of the category and on the opportunity cost of retail shelf space. Our analysis reveals that irrespective of the form of category management, the retailer can use category shelf space strategically to control the intensity of competition between manufacturers to his benefit. We find that shelf space scarcity significantly affects conditions under which category captainship would naturally emerge by benefiting the retailer and the category captain. Category captainship has been criticized for disadvantaging non-captain manufacturers. While we provide support for this claim, we also find that category captainship may benefit non-captain manufacturers when implemented by a powerful retailer in categories with sufficiently differentiated products.