Market power and trade promotions in US supermarkets

Abstract

PurposeTrade promotions are manufacturer incentives directed to retailers rather than to consumers, aiming at influencing retailer's sales, prices and merchandising practices. Although they are a growing element in the promotional mix of food manufacturers worldwide, trade promotions often raise concerns about their impacts on performance and coordination in the food supply chain, which in turn affect retail food prices. This paper aims to measure the influence of market power on the outcomes of trade promotions negotiated between food manufacturers and supermarkets.Design/methodology/approachThe paper employs Rangan's conceptual model to develop hypotheses about the links between three dimensions of market power (size, brand and institutional power) and trade promotion budgets and their allocation between discount‐ and performance‐based types. The paper employs trade promotion data collected from 36 supermarkets in the USA to statistically test these links.FindingsThe results suggest that brand, size, and institutional power of food manufacturers and retailers affect trade promotion budgets and their allocation among discount‐ and performance‐based types. Food manufacturers have relatively more control over their trade promotion budgets whereas retailers may have more influence on the allocation decisions.Originality/valueThe findings can help food manufacturers and retailers identify institutional, brand and size variables that may help them leverage trade promotion negotiations. The results are relevant to policymakers, in particular for the study of antitrust and performance issues in the food distribution system.