Antitrust Analysis Of Slotting Allowances And Category Management Contracts
Slide 1
ANTITRUST ANALYSIS OF
SLOTTING ALLOWANCES AND
CATEGORY MANAGEMENT CONTRACTS
Joshua D. Wright
George Mason University Law School
FTC/DOJ Joint Hearings on Single Firm Conduct
11/15/2006
Slide 2
My comments are based upon two forthcoming articles co-authored with Benjamin Klein (available on the website):
- The Economics of Slotting Contracts (forthcoming JLE, 2007)
- Antitrust Analysis of Category Management: Conwood v. U.S. Tobacco
Slide 3
Slotting arrangements: per unit time payments made by manufacturers to retailers for shelf space.
- usually bind the grocer to provide shelf placement for a six month to one year period
- can cover both new and established products
- arose in grocery retailing around 1984
- over the past 20 years, have become more pervasive, increasing in size and covering a larger number of grocery products
Slide 4
Anticompetitive theories do not explain the growth and prevalence of slotting contracts:
- Frequently used by manufacturers with small market shares
- Most involve only short-term shelf space commitments
- Significant economies of scale in manufacturing are absent for many grocery products where we observe slotting contracts
- Anticompetitive theories do not explain the growth of supermarket slotting contracts in the 1980s
Slide 5
Two key economic questions that must be answered with respect to slotting fees are:
- Why must manufacturers explicitly contract with retailers for the provision of shelf space?
- Why do shelf space contracts sometimes include exclusivity provisions?
Slide 6
Slotting contracts solve incentive incompatibility involving retailer undersupply of promotion when there are little or no inter-retailer competitive effects from the supply of promotional shelf space
Slide 7
A Promotional Services Theory of Slotting Contracts
Retailers supply less than the joint profit-maximizing level of promotion because they do not consider the manufacturer profit margin on incremental sales
For many products
- the retailer’s incremental profit
- (PR - MCR),
- is a small fraction of the manufacturer’s incremental profit
- (PW - MCM)
Slide 8
For Price Competition:
inter-retailer competitive effects offset the relatively small retail margin to approximately produce the optimum amount of retail price competition
inter-retailer competitive effects
inter-brand competitive effects
The distortion is not present on all forms of non-price competition.
- Facilitating contracting over promotional shelf space by efficiently defining what the manufacturer is purchasing
- Exclusivity allows the retailer to obtain a greater rate of return on its shelf space by committing its promotional sales to the manufacturer
- Shelf space payments, regardless of their form, are passed on to consumers in competitive retail markets
- The efficient shelf space contract in these circumstances is a limited exclusive
- Category management contracts are a form of limited exclusive which delegate performance to the manufacturer and the policing function to the retailer
- Conwood paradoxically appears to impose a more stringent standard on category managers than dominant firms with full exclusives
- UST’s conduct violated tort law but was unlikely to generate anticompetitive effects
Lessons for Exclusive Dealing Analysis
- Full or limited exclusives, including category management contracts, are frequently an element of the competitive process for distribution and “make economic sense”
- Section 2 standards must vigorously enforce the requirements that plaintiffs demonstrate an anticompetitive effect under a rule of reason analysis