Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?

Slotting allowances are lump-sum payments by manufacturers to retailers for stocking new products. The economic rationale for slotting allowances is controversial. Several theoretical arguments have been provided for the use of slotting allowances. Some are based on efficiency considerations: (1) efficient allocation of scarce retail shelf space; (2) equitable allocation of new product failure risk between manufacturers and retailers; and (3) signaling device for manufacturers to communicate private information about potential success to the retailer. Others have argued that slotting allowances are anti-competitive. They argue that (1) manufacturers use slotting allowances to reduce retail competition; (2) retailers use slotting allowances to extract manufacturer profits by exercising power, thus adversely affecting smaller manufacturers and reducing consumer access to products. However, empirical research has been virtually nonexistent due to the difficulty in obtaining data about these transactions. Using data on all new products that were offered to one retailer for a period of six months, we empirically investigate support for the alternative rationales for slotting allowances. Our analysis indicates that broadly there is more support for the efficiency theories than for the anticompetitive theories. We find evidence that slotting allowances (1) serve to efficiently allocate scarce retail shelf space; (2) help balance the risk of new product failure between manufacturers and retailers; (3) help manufacturers signal private information about potential success of new products and (4) serve to widen retail distribution for manufacturers by mitigating retail competition. We find little support for the anti-competitive rationales in our data. The fact that we find support for the efficiency rationales suggests that the FTC was correct in being circumspect about banning slotting allowances outright.