A new study conducted by researchers at Yale University and Cornell University suggests that while retailers, manufacturers, and regulators have long debated the controversial role of slotting allowances, they believe that slotting allowances do support efficiency in the marketplace.
The study – entitled "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?" and written by K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell – offers data showing that “slotting allowances help balance the risk of new product failure between manufacturers and retailers; help manufacturers signal private information about potential success of new products; and serve to widen retail distribution for manufacturers by mitigating retail competition.”
"We find that when retailers perceive that a product is likely to be a sure hit, they don't seem to ask for slotting allowances; further, manufacturers don't offer slotting allowances when they perceive the product to be a sure dud either, because they are unlikely to recover the money from sales," said Sudhir. "It is in the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space. This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."
This finding is true for both large and small manufacturers and suggests that the popular argument that slotting allowances are a means to eliminate competition from small manufacturers does not have much empirical support.
"Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector," said Sudhir.
The study – entitled "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?" and written by K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell – offers data showing that “slotting allowances help balance the risk of new product failure between manufacturers and retailers; help manufacturers signal private information about potential success of new products; and serve to widen retail distribution for manufacturers by mitigating retail competition.”
"We find that when retailers perceive that a product is likely to be a sure hit, they don't seem to ask for slotting allowances; further, manufacturers don't offer slotting allowances when they perceive the product to be a sure dud either, because they are unlikely to recover the money from sales," said Sudhir. "It is in the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space. This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."
This finding is true for both large and small manufacturers and suggests that the popular argument that slotting allowances are a means to eliminate competition from small manufacturers does not have much empirical support.
"Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector," said Sudhir.
- KC's View:
- While disagreeing with Yale and Cornell isn’t always a smart career move, we still think that slotting allowances encourage retailers to make money on the buy, not the sell. And while maybe there are cases where they make sense, the opportunities for abuse just seem too high.
