Can Margin Differences in Vertical Marketing Channels Lead to Contracts with Slotting Fees?

In this paper, we show that slotting fees can be part of an equilibrium solution if per-unit downstream margin is smaller than the per-unit upstream margin. In recent literature, a similar margin-based argument is made by Klein and Wright (2007), whereas intense downstream retail competition coupled with high upstream margin causes upstream manufacturers to offer slotting fees for promotional shelf space. In this paper, we generalize this argument and show that it is possible to have the margin-based argument without any downstream retail competition and competition between products within a retail chain. Interestingly we show that slotting fees will be larger if the products sold by a retailer are complements rather than substitutes. Using a model of a channel bargaining game, we also provide the necessary and sufficient conditions for the existence of slotting fees and show that for contracts with slotting fees under full vertical coordination, upstream marginal cost functions need to be increasing. Broadly, our findings provide new insights into the strategic role of downstream product assortment on equilibrium-marketing-channel contracts with slotting fees.

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