Slotting allowances and retailer market power

Abstract

Purpose

This paper attempts to understand the relationship between retailer market power and the slotting allowances demanded by large retailers.

Design/methodology/approach

A bilateral oligopoly model is used to study slotting allowances in retailing industries. The upstream market is a symmetric duopoly. In the downstream, a large retailer competes with many small retailers. Only the large retailer is capable of requiring slotting fees.

Findings

The model suggests that the large retailer uses slotting fees to capitalize its market power. By requiring the fees from manufacturers, the large retailer raises the wholesale prices faced by competing small retailers, and therefore, lowers their profit margins and market shares.

Research limitations/implications

More empirical evidences are desirable to support the theory. Regarding the modeling, it might be interesting to explicitly model the bargaining between the large retailer and manufacturers.

Practical implications

Requiring slotting allowances is an exclusionary strategy of large retailers. Abuse of slotting allowances might have antitrust concern.

Originality/value

This paper presents probably the first analytic model that considers slotting allowances in an asymmetric bilateral oligopoly. This approach is interesting because slotting allowances are most likely to make difference when manufacturers are oligopolistic and retailers are heterogeneous in sizes.

Citation

Wang, H. (2006), "Slotting allowances and retailer market power", Journal of Economic Studies, Vol. 33 No. 1, pp. 68-77. https://doi.org/10.1108/01443580610639901