Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices

TLDR

In a perfectly competitive industry, producers compete for shelf space, and slotting allowances arise in equilibrium when contracts are observable. Equilibria are ranked using standard social welfare criteria. Producers offset high wholesale prices with upfront payments to retailers, but when wholesale terms are unobservable, resale price maintenance emerges (though not universally) and, despite being less efficient than marginal‑cost pricing, it generates higher surplus than slotting allowances.

Abstract

Producers in a perfectly competitive industry compete to obtain shelf space at the retail level. Barring contract observability problems, slotting allowances are observed in equilibrium. Producers charge a high wholesale price, but they give back their profits via up-front payments to retailers. However, if the individual supplier-retailer wholesale price terms are unobservable by competitors, then resale price maintenance will be seen, but the coverage will not be universal. The equilibria can be ranked by the usual social welfare criteria. Resale price maintenance, though worse than simple marginal cost wholesale pricing, yields greater surplus than the slotting allowance equilibrium.