Bargaining and Contract Forms in Distribution Channels: Why Do Slotting Fees Arise and Linear Contracts Persist?

Two empirical patterns emerge in business-to-business settings, particularly in retail distribution channels such as grocery markets. First, linear contracts are widely observed alongside nonlinear contracts with fixed payments, despite the claimed efficiency advantages of the latter. Second, when fixed payments arise, they often flow from suppliers to retailers (slotting fees) rather than the reverse. We develop and analyze a model of multilateral bargaining in which a supplier negotiates separately with competing retailers to explain these patterns. The key mechanism is a trade-off between two distortions: under linear contracts, wholesale prices reflect bargaining power and can be either above or below the channel-profit-maximizing level, whereas under two-part tariffs, wholesale prices are set to maximize bilateral surplus independently of bargaining power but are systematically too low from an overall channel perspective because of rent shifting across relationships. As a result, neither contractual form uniformly dominates; instead, relative performance depends on how bargaining shapes gains from trade across firms. When bargaining leads to slotting fees, two-part tariffs yield higher channel profits than linear contracts, whereas when it would imply payments from retailers to suppliers, linear contracts may perform better. These findings offer a unified explanation for the persistence of linear contracts alongside two-part tariffs, the direction of fixed payments, and the conditions under which each contractual form is likely to arise.

This paper was accepted by Miguel Villas-Boas, marketing.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2025.03426.