IDEAS home Printed from https://ideas.repec.org/p/zwi/fpcrep/084.html
   My bibliography  Save this paper

Paying For Shelf Space: An Investigation Of Merchandising Allowances In The Grocery Industry

Author

Listed:
  • Adam D. Rennhoff

Abstract

This research examines the behavior of manufacturers and retailers in the presence of merchandising allowances. Merchandising allowances are fees manufacturers pay retailers to encourage them to allocate certain in-store promotional activities to the manufacturers' brand. According to estimates, retailers collect billions of dollars in these allowance payments annually. Using a three-stage game, I formulate a vertical structural model that endogenously models manufacturer, retailer, and consumer behavior. Manufacturers compete with each other, using merchandising allowance payments, in order to obtain premium shelf space at retail outlets. Retailers, given allowance offers, choose display configurations and then set retail prices. Consumers observe the display and retail prices and determine whether to purchase one or no units of the good. I estimate the model with a method of moments technique using IRI scanner data from the ketchup industry. In addition to estimating consumer tastes parameters, the model yields predictions of the underlying wholesale prices and the merchandising allowances each manufacturer offers. I use the parameter estimates to conduct a counterfactual simulation of how agents might respond when the use of merchandising allowances is no longer permissible. I find that while merchandising allowances increase retail profits, total welfare is lower due to the allowances.

Suggested Citation

  • 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.
    • Handle: RePEc:zwi:fpcrep:084
    as

    Download full text from publisher

    File URL: http://fmpc.uconn.edu/publications/rr/rr84.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Michelle Sovinsky Goeree, 2005. "Advertising in the US Personal Computer Industry," Industrial Organization 0503002, University Library of Munich, Germany.
    2. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    3. 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.
    4. 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.
    5. Anderson, Evan E, 1979. "An Analysis of Retail Display Space: Theory and Methods," The Journal of Business, University of Chicago Press, vol. 52(1), pages 103-118, January.
    6. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
    7. Simon P. Anderson & André de Palma, 2001. "Product Diversity in Asymmetric Oligopoly: Is the Quality of Consumer Goods too Low?," Journal of Industrial Economics, Wiley Blackwell, vol. 49(2), pages 113-135, June.
    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. William Comanor & Patrick Rey, 2000. "Vertical Restraints and the Market Power of Large Distributors," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(2), pages 135-153, September.
    10. Terry Elrod, 1988. "Choice Map: Inferring a Product-Market Map from Panel Data," Marketing Science, INFORMS, vol. 7(1), pages 21-40.
    11. repec:dau:papers:123456789/1757 is not listed on IDEAS
    12. 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.
    13. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    14. Pierre Desmet & Valérie Renaudin, 1998. "Estimation of Product Category Sales Responsiveness to Allocated Shelf Space," Post-Print halshs-00143451, HAL.
    15. DeVuyst, Cheryl Sinn, 2000. "Slotting Allowances, Failure Fees And Asymmetric Information In The Grocery Supply Chain," 2000 Annual Meeting, June 29-July 1, 2000, Vancouver, British Columbia 36388, Western Agricultural Economics Association.
    16. 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.
    17. Sullivan, Mary W, 1997. "Slotting Allowances and the Market for New Products," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 461-493, October.
    18. Martin A. Lariviere & V. Padmanabhan, 1997. "Slotting Allowances and New Product Introductions," Marketing Science, INFORMS, vol. 16(2), pages 112-128.
    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. Benjamin Klein & Joshua D. Wright, 2007. "The Economics of Slotting Contracts," Journal of Law and Economics, University of Chicago Press, vol. 50(3), pages 421-454.
    2. Hao Wang, 2004. "Slotting Allowances and Retailer Market Power," Industrial Organization 0411009, University Library of Munich, Germany.
    3. Hao Wang, 2006. "Slotting allowances and retailer market power," Journal of Economic Studies, Emerald Group Publishing, vol. 33(1), pages 68-77, January.

    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. 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.
    3. 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.
    4. 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.
    5. Draganska, Michaela & Vitorino, Maria Ana, 2023. "Decomposing the effect of advertising: What happens in the retail channel?," International Journal of Research in Marketing, Elsevier, vol. 40(1), pages 226-247.
    6. 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.
    7. 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.
    8. K. Sudhir, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Marketing Science, INFORMS, vol. 20(3), pages 244-264, October.
    9. 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.
    10. Andrew Lim & Brian Rodrigues & Xingwen Zhang, 2004. "Metaheuristics with Local Search Techniques for Retail Shelf-Space Optimization," Management Science, INFORMS, vol. 50(1), pages 117-131, January.
    11. Naoki Wakamori, 2011. "Portfolio Considerations in Differentiated Product Purchases: An Application to the Japanese Automobile Market," Staff Working Papers 11-27, Bank of Canada.
    12. 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.
    13. Øystein Foros & Hans Jarle Kind & Jan Yngve Sand, 2009. "Slotting Allowances and Manufacturers' Retail Sales Effort," Southern Economic Journal, John Wiley & Sons, vol. 76(1), pages 266-282, July.
    14. Ralph Siebert, 2002. "Learning by Doing and Multiproduction Effects over the Life Cycle: Evidence from the Semiconductor Industry," CIG Working Papers FS IV 02-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    15. Vishal Singh & Ting Zhu, 2008. "Pricing and Market Concentration in Oligopoly Markets," Marketing Science, INFORMS, vol. 27(6), pages 1020-1035, 11-12.
    16. Hongmin Li & Woonghee Tim Huh, 2011. "Pricing Multiple Products with the Multinomial Logit and Nested Logit Models: Concavity and Implications," Manufacturing & Service Operations Management, INFORMS, vol. 13(4), pages 549-563, October.
    17. Steven T. Berry & Philip A. Haile, 2014. "Identification in Differentiated Products Markets Using Market Level Data," Econometrica, Econometric Society, vol. 82, pages 1749-1797, September.
    18. Yonezawa, Koichi & Richards, Timothy J., 2016. "Competitive Package Size Decisions," Journal of Retailing, Elsevier, vol. 92(4), pages 445-469.
    19. Geng, Qin & Minutolo, Marcel C., 2010. "Failure fee under stochastic demand and information asymmetry," International Journal of Production Economics, Elsevier, vol. 128(1), pages 269-279, November.
    20. K. Sudhir, 2001. "Competitive Pricing Behavior in the Auto Market: A Structural Analysis," Marketing Science, INFORMS, vol. 20(1), pages 42-60, January.

    More about this item

    Keywords

    Industrial Organization; Marketing;

    Statistics

    Access and download statistics

    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:zwi:fpcrep:084. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/dauctus.html .

    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.