Greg Shaffer

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

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.

Competitive One-to-One Promotions

One-to-one promotions are possible when consumers are individually addressable and firms know something about each customers preferences. We explore the competitive effects of one-to-one promotions in a model with two competing firms where the firms differ in size and consumers have heterogeneous brand loyalty. We find that one-to-one promotions always lead to an increase in price competition (average prices in the market decrease). However, we also find that one-to-one promotions affect market shares. This market-share effect may outweigh the effect of lower prices, benefiting the firm whose market share increases. Our results suggest that of two firms, the firm with the higher-quality product may gain from one-to-one promotions. Our model also has implications for the phenomenon of customer churn, where consumers switch to a less preferred brand due to targeted promotional incentives. We show that churning can arise optimally from firms pursuing a profit-maximizing strategy. Instead of trying to minimize it, the optimal way to manage customer churn is to engage in both offensive and defensive promotions with the relative mix depending on the marginal cost of targeting.

Retail Mergers: Buyer Power and Product Variety

This Paper analyses the impact of retail mergers on product variety. We show that a merging firm may want to enhance its buyer power vis a vis suppliers by delisting products and committing to a ‘single-sourcing’ purchasing strategy. Anticipating this, suppliers will strategically choose to produce less differentiated products, which further reduces product variety. If negotiations are efficient the loss in product variety reduces overall industry profit and, possibly, also consumer welfare. With linear tariffs, however, there may be a countervailing effect as the more powerful retailer passes on lower input prices to final consumers.

Bargaining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers

We examine the output and profit effects of horizontal mergers between differentiated upstream firms in an intermediate-goods market served by a downstream monopolist. If the merged firm can bundle, transfer pricing is efficient before and after the merger. Absent cost efficiencies, consumer and total welfare do not change. If the merged firm cannot bundle and its bargaining power is sufficiently high, transfer pricing is inefficient after the merger. Absent cost efficiencies, welfare typically falls. We evaluate the profit effects of mergers for the case of two-part tariff contracts. Rival firms gain (lose) from mergers that raise (lower) downstream prices. Contrary to conventional wisdom, a merger that harms the retailer may increase welfare.

Slotting Allowances and Scarce Shelf Space

Slotting allowances are payments made by manufacturers to obtain retail shelf space. They are widespread in the grocery industry and a concern to antitrust authorities. A popular view is that slotting allowances arise because there are more products than retailers can profitably carry given their shelf space. We show that the causality can also go the other way: the scarcity of shelf space may in part be due to the feasibility of slotting allowances. It follows that slotting allowances can be anticompetitive even if they have no effect on retail prices.

Predatory accommodation: below-cost pricing without exclusion in intermediate goods markets

We show that below-cost pricing can arise in intermediate goods markets when a monopolist retailer negotiates sequentially with two suppliers of substitute products. Below-cost pricing by one supplier allows the retailer to extract rents from the second supplier. Thus, the retailer and one supplier can increase their joint profit at the expense of the second supplier. We consider the welfare implications of below-cost pricing (welfare can increase or decrease as a result of below-cost pricing) and provide suggestions for when the courts should view below-cost pricing in intermediate goods markets as anticompetitive and when they should not.

Capturing Strategic Rent: Full-Line Forcing, Brand Discounts, Aggregate Rebates, and Maximum Resale Price Maintenance

This paper examines the implications of a retailers shelf space stocking decisions on the optimal marketing strategy of an upstream multiproduct monopolist. When the retailers opportunity cost of shelf space is known, full-line forcing, brand discounts, and maximum resale price maintenance are sufficient to achieve the monopolist manufacturers first best profit. When these strategies are adopted, the retailers profit is reduced to the scarcity rents obtainable on her shelf space. When the retailers opportunity cost of shelf space is unknown, the use of aggregate rebates can act as a screening device to maximize channel profit. Copyright 1991 by Blackwell Publishing Ltd.

On the Dampening-of-Competition Effect of Exclusive Dealing

The authors compare and contrast the profit and welfare effects of exclusive dealing, sales through a common retailer, and vertical integration. As did Y. J. Lin (1990), the authors find that imperfectly competitive manufacturers prefer to impose exclusive dealing on their retailers. Unlike Lin, the authors find that welfare is higher under exclusive dealing than when products are sold through a common retailer. This finding suggests a new interpretation of the Standard Stations v. United States 1949 antitrust case. Copyright 1993 by Blackwell Publishing Ltd.

Slotting allowances and optimal product variety

Abstract Some commentators believe that slotting allowances enhance social welfare by providing retailers with an efficient way to allocate scarce retail shelf space. The claim is that, by offering their shelf space to the highest bidders, retailers act as agents for consumers and ensure that only the most socially desirable products obtain distribution. I show that this claim does not hold in a model in which a dominant firm and competitive fringe compete for retailer patronage. By using slotting allowances to bid up the price of shelf space, the dominant firm can sometimes exclude the competitive fringe even when welfare would be higher if the fringe obtained distribution.

Promises to match or beat the competition: Evidence from retail tire prices

Given the widespread adoption of low-price guarantees and discussion of their anti-competitive effects in the theoretical literature, it is unfortunate that there is little empirical evidence available on the subject. This chapter analyzes the effects of low-price guarantees on advertised tire prices, based on P185/75R14 retail tire prices collected from U.S. Sunday newspapers. We find that although a tire retailers own price-matching or price-beating guarantee has no significant effect on the retailers advertised tire price, an increase in the percentage of firms in the market announcing low-price guarantees tends to raise the firms advertised tire price. In particular, we find that the predicted tire prices are approximately