Do Slotting Contracts Harm Consumers?

Josh Wright —  18 April 2006

Warning: shameless plug of my own research to follow!

Slotting allowances, or payments for shelf space, have been a central part of my research agenda for the last several years. My work with Ben Klein, The Economics of Slotting Contracts, presents a procompetitive theoretical explanation (and some aggregate data in support of our theory) for slotting contracts which I have blogged about from time to time. One of the reasons that I enjoy this topic is because payments for distribution are pervasive. They dont just take place in supermarkets, but also in drug stores, bookstores, internet search engines, at radio stations (i.e., payola), and elsewhere. The most challenging problem associated distribution payment research such as slotting is that data are extremely difficult to come by. Manufacturers and retailers face significant antitrust exposure from government agencies and private plaintiffs for these contracts and are therefore understandably a bit hesitant to share micro-level data. But empirical evidence is precisely what is needed to resolve some first order antitrust policy debates regarding the competitive effects of slotting and other payments for distribution. Even without this evidence, states like California have proposed legislation that would force retailers to disclose competitors’ slotting payments to rivals and antitrust litigation thrives.

I recently posted my own attempt to add to the empirical literature, Slotting Contracts and Consumer Welfare,to SSRN (forthcoming in the Antitrust Law Journal in early 2007). I am especially proud of this paper because it took a good deal of time and effort, some creativity, and a little bit of luck to find what I think is a pretty special data set. Long story (relatively) short: I discovered that military commissaries operated by the Department of Defense Commissary Agency (DeCA) accepted slotting payments during 2000-01 before terminating this project in response to Congressional pressure. I was able to make use of the FOIA process to get my hands on all of the slotting contracts governing shelf space relationships (and sales data before and after the ban) and exploit the natural experiment to identify the competitive impact of slotting on prices, output, and variety. The data set also includes the precise location of the product on the shelf (i.e. eye level, bottom shelf, square inches of product space, adjacent products, etc.). While this paper addresses the first order antitrust question with respect to competitive effects, there are a ton of other interesting questions: Who is slotting? Who isn’t? What explains the variance in the contracts? What happens to “small” rivals when the slotting ban hits? Does their relative shelf space position improve? Wes Hartmann (Stanford GSB) and I are working on answering these questions in a couple of papers to follow. In any event, here is the abstract:

Slotting contracts involve manufacturer payments for retail shelf space. Slotting is an increasingly important part of the competitive process in many product markets, and has been the subject of congressional hearings, agency investigations, antitrust litigation, and scholarly debate. However, very little is known about the competitive consequences of slotting. This paper uses a unique data set consisting of slotting contracts at military commissaries prior to an exogenously imposed slotting ban to identify the impact of slotting on consumer welfare. This natural experiment provides a unique opportunity to directly answer the crucial policy counterfactual: would banning slotting contracts increase consumer welfare? The analysis measures the impact of slotting, at both the product and category levels, on prices, output, and product variety. I find no evidence that slotting is anticompetitive. To the contrary, the results suggest that slotting contracts provide substantial net benefits to consumers once one accounts for the unmeasured pass-through of slotting payments.

Comments are always welcome.

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  1. TRUTH ON THE MARKET » Updated Drafts on SSRN - March 2, 2007

    […] Slotting Contracts and Consumer Welfare (forthcoming in the Antitrust Law Journal and previously blogged about here). […]