Retail Category Management with Slotting Fees

Abstract

Problem definition: Slotting fees are lump-sum payments retailers demand from manufacturers to include manufacturers’ products in their assortments. Although retailers regard slotting fees as part of doing business, some manufacturers claim that slotting fees limit their ability to compete on a level playing field with other manufacturers. Considering these conflicting views, we study the role of manufacturer competition in the emergence of slotting fees and how slotting fees affect retailers’ category management (i.e., assortment and pricing) decisions. Methodology/results: We consider a game-theoretic model with a single retailer and two competing manufacturers, each offering a single product. The retailer makes slotting fee, assortment, and pricing decisions in the presence of an operational cost term that increases in the assortment size. The manufacturers that can afford the slotting fee set the wholesale prices for their products. This study leads to three key findings. First, slotting fees can be suboptimal when their absence would trigger intense wholesale price competition. Second, depending on the retailer’s operational cost and the intensity of manufacturer competition, slotting fees create three distinct effects -category expansion, rent extraction, and competitive exclusion under which product variety (i.e., the retailer’s assortment size) increases, remains unchanged, and decreases, respectively. Third, slotting fees are most (least) beneficial for the retailer when they lead to a decrease (increase) in product variety. Managerial implications: This study not only illustrates that retailers can use slotting fees as a strategic tool to control the intensity of manufacturer competition but also reveals how slotting fees impact retailers’ assortment and pricing decisions, with implications for manufacturers and policy makers. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0143 .