Slotting Allowances and Long-Run Channel E ciency

In retail markets, slotting allowances have become a common practice, i.e. manufacturers pay lump-sum fees to retailers for initially stocking their products. However, the e ect of these payments on channel e ciency is still discussed controversially among practitioners and researchers. Due to severe data restrictions, substantial empirical research is rare, with the notable exceptions of Rao and Mahi (2003) and Sudhir and Rao (2006), and has provided contradictory results. Previous theoretic research in the vein of Sha er (1991) is restricted to a single period of competition and focuses on slotting allowances as the xed part of a two-part tari . Accordingly, little is known about the impact of one-time slotting allowances on long-run channel e ciency. To address this issue, we build upon Pakes and McGuire (1994) and develop a dynamic model of entry and vertical competition, where strategic actions stem from a single Markov perfect equilibrium. More speci cally, retailers decide upon assortments, whereas manufacturers may enter or exit the market and invest in product quality. We allow manufacturers to o er slotting allowances to the retailers and evaluate their impact on long-run industry evolution and, ultimately, rm values and social welfare. Finally, we show under which conditions with respect to information uncertainty, costs and competition slotting allowances are more or less e ciency enhancing.