Slotting allowances and the market for new products

Slotting allowances are fixed fees paid to retailers by manufacturers in return for stocking new products on a trial basis. While slotting allowances emerged over 10 years ago, there is still no consensus on what purpose the fees serve. This article shows that slotting allowances are consistent with competitive behavior and could have been caused by an increase in the supply of products. A consumer search cost model predicts that when an increase in the supply of products is not accompanied by an increase in sales per store, the equilibrium slotting allowance will increase. The implications of the model are supported by trends in new-product activity, sales per store, and prices in the grocery industry. Anticompetitive explanations for slotting allowances are refuted by the trends in retailer and manufacturer profits and prices.