IDEAS home Printed from https://ideas.repec.org/a/bpj/bjafio/v6y2008i1n9.html
   My bibliography  Save this article

Paying for Shelf Space: An Investigation of Merchandising Allowances in the Grocery Industry

Author

Listed:
  • Rennhoff Adam

    (Middle Tennessee State University)

Abstract

Merchandising allowances are fees paid by manufacturers to retailers in order to encourage the allocation of in-store promotional activities to the manufacturers' brand. I use a three-stage game framework to formulate a vertical structural model, which endogenizes manufacturer, retailer, and consumer decisions in the presence of merchandising allowances. The model allows for non-linear vertical pricing contracts using merchandising allowances paid to retailers. This differs from previous work which has focused on franchise fees paid to manufacturers. The model is estimated using store-level weekly data from the ketchup industry. In addition to estimates of consumer taste parameters, the model also yields predictions of wholesale prices and the size (dollar value) of the merchandising allowances. Counterfactual simulations reveal that merchandising allowances lead to an increase in retail profits, a decline in manufacturer profits, a decline in consumer surplus, and reduction in total welfare.

Suggested Citation

  • Rennhoff Adam, 2008. "Paying for Shelf Space: An Investigation of Merchandising Allowances in the Grocery Industry," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(1), pages 1-40, October.
    • Handle: RePEc:bpj:bjafio:v:6:y:2008:i:1:n:9
    DOI: 10.2202/1542-0485.1233
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1542-0485.1233
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.2202/1542-0485.1233?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2004. "Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," IDEI Working Papers 370, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2006.
    2. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    3. Villas-Boas, Sofia & Hellerstein, Rebecca, 2006. "Identification of supply models of retailer and manufacturer oligopoly pricing," Economics Letters, Elsevier, vol. 90(1), pages 132-140, January.
    4. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    5. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-476, Fall.
    6. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
    7. Martin Pesendorfer, 2002. "Retail Sales: A Study of Pricing Behavior in Supermarkets," The Journal of Business, University of Chicago Press, vol. 75(1), pages 33-66, January.
    8. Pradeep Chintagunta & Jean-Pierre Dubé & Vishal Singh, 2003. "Balancing Profitability and Customer Welfare in a Supermarket Chain," Quantitative Marketing and Economics (QME), Springer, vol. 1(1), pages 111-147, March.
    9. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    10. Villas-Boas, Sofia B & Hellerstein, Rebecca, 2006. "Identification of Supply Models of Manufacturer and Retailer Oligopoly Pricing," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9zh144zt, Department of Agricultural & Resource Economics, UC Berkeley.
    11. Walters, Rockney G. & Bommer, William, 1996. "Measuring the Impact of Product and Promotion-Related Factors on Product Category Price Elasticities," Journal of Business Research, Elsevier, vol. 36(3), pages 203-216, July.
    12. Julie H. Mortimer, 2008. "Vertical Contracts in the Video Rental Industry -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 165-199.
    13. Ralph A. Winter, 1993. "Vertical Control and Price Versus Nonprice Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 61-76.
    14. Feighery, E.C. & Ribisl, K.M. & Achabal, D.D. & Tyebjee, T., 1999. "Retail trade incentives: How tobacco industry practices compare with those of other industries," American Journal of Public Health, American Public Health Association, vol. 89(10), pages 1564-1566.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hao Wang, 2008. "Shelf Space Fees and Inter-Brand Competition," Development Economics Working Papers 22890, East Asian Bureau of Economic Research.
    2. Xiao Meng & Edward C. Jaenicke, 2021. "Welfare analysis of introducing private label packaged salads into the US market," Agribusiness, John Wiley & Sons, Ltd., vol. 37(3), pages 650-664, July.
    3. Kim, Nayeong & Lee, Dongmin & Cho, Seonghwan & Moon, Junghoon, 2023. "The effect of exclusive distribution on the sales of ready-made meals in online retail," Journal of Retailing and Consumer Services, Elsevier, vol. 75(C).
    4. Sheldon, Ian M., 2017. "The Competitiveness Of Agricultural Product And Input Markets: A Review And Synthesis Of Recent Research," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 49(1), pages 1-44, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rennhoff, Adam D., 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Research Reports 25155, University of Connecticut, Food Marketing Policy Center.
    2. Sofia Berto Villas‐Boas, 2009. "An empirical investigation of the welfare effects of banning wholesale price discrimination," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 20-46, March.
    3. Chan, Tat Y. & Narasimhan, Chakravarthi & Yoon, Yeujun, 2017. "Advertising and price competition in a manufacturer-retailer channel," International Journal of Research in Marketing, Elsevier, vol. 34(3), pages 694-716.
    4. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    5. Celine Bonnet & Pierre Dubois & Sofia B. Villas Boas & Daniel Klapper, 2013. "Empirical Evidence on the Role of Nonlinear Wholesale Pricing and Vertical Restraints on Cost Pass-Through," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 500-515, May.
    6. Rebecca Hellerstein & Sofia Berto Villas-Boas, 2006. "Arm's-length transactions as a source of incomplete cross-border transmission: the case of autos," Staff Reports 251, Federal Reserve Bank of New York.
    7. Villas-Boas, Sofia Berto, 2007. "Using Retail Scanner Data for Upstream Merger Analysis: Counterfactual Experiments in the Retail Coffee Market," CUDARE Working Papers 7163, University of California, Berkeley, Department of Agricultural and Resource Economics.
    8. Rebecca Hellerstein, 2005. "A Decomposition of the Sources of Incomplete Cross-Border Transmission," 2005 Meeting Papers 805, Society for Economic Dynamics.
    9. Timothy Richards, 2007. "A nested logit model of strategic promotion," Quantitative Marketing and Economics (QME), Springer, vol. 5(1), pages 63-91, March.
    10. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 625-652.
    11. Adam D. Rennhoff, 2004. "Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry," Food Marketing Policy Center Research Reports 084, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    12. Sofia Berto Villas-Boas, 2007. "Using Retail Data For Upstream Merger Analysis," Journal of Competition Law and Economics, Oxford University Press, vol. 3(4), pages 689-715.
    13. Richards, Timothy J. & Hamilton, Stephen F. & Patterson, Paul M., 2010. "Spatial Competition and Private Labels," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(2), pages 1-26, August.
    14. Pinelopi Koujianou Goldberg & Rebecca Hellerstein, 2006. "A Framework for Identifying the Sources of Local-Currency Price Stability with an Empirical Application," 2006 Meeting Papers 625, Society for Economic Dynamics.
    15. Avi Goldfarb & Qiang Lu & Sridhar Moorthy, 2009. "Measuring Brand Value in an Equilibrium Framework," Marketing Science, INFORMS, vol. 28(1), pages 69-86, 01-02.
    16. Dongling Huang & Christian Rojas & Frank Bass, 2008. "What Happens When Demand Is Estimated With A Misspecified Model?," Journal of Industrial Economics, Wiley Blackwell, vol. 56(4), pages 809-839, December.
    17. Tenn, Steven & Yun, John M., 2008. "Biases in demand analysis due to variation in retail distribution," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 984-997, July.
    18. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    19. Hellerstein, Rebecca, 2008. "Who bears the cost of a change in the exchange rate? Pass-through accounting for the case of beer," Journal of International Economics, Elsevier, vol. 76(1), pages 14-32, September.
    20. Sharat Ganapati, 2018. "The Modern Wholesaler: Global Sourcing, Domestic Distribution, and Scale Economies," Working Papers 18-49, Center for Economic Studies, U.S. Census Bureau.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bjafio:v:6:y:2008:i:1:n:9. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.