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ANTITRUST ANALYSIS OF
Joshua D. Wright
FTC/DOJ Joint Hearings on Single Firm Conduct
My comments are based upon two forthcoming articles co-authored with Benjamin Klein (available on the website):
Slotting arrangements: per unit time payments made by manufacturers to retailers for shelf space.
Anticompetitive theories do not explain the growth and prevalence of slotting contracts:
Two key economic questions that must be answered with respect to slotting fees are:
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
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
For Price Competition:
inter-retailer competitive effects offset the relatively small retail margin to approximately produce the optimum amount of retail price competition
is much greater than
because there are
inter-retailer competitive effects
in addition to
inter-brand competitive effects
However, because promotional shelf space creates “impulse sales”, there are small inter-retailer demand effects
The distortion is not present on all forms of non-price competition.
If consumers value the non-price service and will switch retailers in response to its supply, e.g., free parking, the joint profit-maximizing quantity will be supplied.
In these fairly general circumstances, the manufacturer will want the retailer to provide more promotional shelf space for its products than the retailer would otherwise provide and a separate contract for shelf space will be necessary.
But the fact that manufacturers compensate retailers for promotional shelf space implies that retailers have the incentive to cheat on the implicit understanding by not supplying the contracted for level of promotion.
There are many pro-competitive rationales for exclusive shelf space arrangements, such as those observed in Gruma, Conwood, McCormick, and Harmar.
Category management contracts an alternative solution to the promotional shelf space contracting problem when consumers’ demand for a particular brand is high.
Lessons for Exclusive Dealing Analysis