A Theoretical and Empirical Investigation of Slotting and Promotional Allowances in the Grocery Industry

This dissertation examines the behavior of manufacturers and retailers in the presence of slotting allowances. Slotting allowances are fees manufacturers pay retailers to encourage them to allocate certain in-store promotional activities to the manufacturer's brand. These promotional activities include such things as an end-of-aisle display or premium shelf space. According to estimates, retailers collect billions of dollars in these allowance payments annually. Public and private sector interest in determining the impact of slotting allowances has lead to an increase in academic research on the topic. Unfortunately, the theoretical work has been unable to reach a consensus regarding whether slotting allowances are welfare-enhancing or reducing. This dissertation attempts to address that question by offering the first empirical model on slotting allowances. Using scanner data on ketchup sales, I construct an interactive model of behavior in which manufacturers compete for premium shelf space at retail outlets. The structural model is based on models of vertical competition and traditional discrete-choice models of differentiated products. Formally modeling firm and consumer behavior allows me to examine the decisions being made: the retailer's shelf space allocation, the wholesale and retail pricing strategies, and the consumer's choice of which product to purchase. In addition to estimating the demand parameters associated with consumer tastes and preferences, the model allows for estimates of manufacturer wholesale prices and slotting allowances. My estimates indicate that Heinz, the market share leader, makes the ii largest slotting allowance payments. They do not make them as frequently, however, as the firm with the second largest market share (Hunts). Using the parameter estimates, I conduct a policy simulation to determine how wholesale prices, retail prices, and, ultimately, consumer surplus respond to an alternative state where slotting allowances are illegal of forbidden. I find that the presence of slotting allowances raises total welfare. Using a consumer surplus measure, I find that, on average, each consumer/household experiences a welfare gain of $0.0006 annually. This figure aggregates to a national total of roughly $80,000 for the ketchup industry. Retail profit is also higher because of slotting allowances, contributing to the net increase in total welfare.

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