Abstract
Problem statement: Trade promotions provided to retailers from suppliers are not well understood and have not been consistently reported by manufacturers. Research about the phenomenon has consequently been limited and neither the trade nor government agencies fully understand the phenomenon and its implications. One implication is that some trade promotions (or trade allowances as they are also known) can pose an ethical dilemma in terms of restricting competition to the disadvantage of smaller businesses. Approach: This research takes advantage of a one-time release of data at the individual firm level which includes firm specific information on trade promotions, which includes slotting fees, provided by manufacturers for placement in retail stores as well as advertising and promotion support for the retailer. Firm level specific data gives the researcher a method of analyzing the use of market power exercised by the manufacturer to influence retail behavior. Further, the analysis of trade promotion practices and market power give an indication of possible uncompetitive conditions created by manufacturers with high potential market power. Results: Findings indicate that firms with high potential market power, based on assets, provide more trade promotions. Firms with high profits derived from high gross margins, also exercise high market power. Both of these findings, in terms of potential market power as well as exercised market power, lend credibility to the argument that high market power firms pose an uncompetitive environment for small suppliers. Conclusion/Recommendations: The Federal Trade Commission (FTC), which previously reviewed this issue, needs to revisit the matter in terms of the creation of the uncompetitive environment that appears to be created through high market power firms. Further, research that considers both the retail and manufacturers’ firm-level data on a broad spectrum should be examined to better understand the situation.
Highlights
Trade promotions are usually negotiated reductions in invoiced dollars from manufacturers to retailers and are not a new phenomenon
The alternative to the market power argument is that trade promotions efficiently diversify the risk of MATERIALS AND METHODS In 2001, the Emerging Issues Task Force (EITF) of product failure between the retailer and the manufacturer
The results indicate that firms selling grain mill products (SIC 204×) on average provide significantly more trade promotions than any other industry group at 16.8%
Summary
Trade promotions are usually negotiated reductions in invoiced dollars from manufacturers to retailers and are not a new phenomenon. It is expected that trade promotions provided by manufacturers will vary based on the measurement of market power used but that overall, firms with more market power, either exercised or potential, will provide more trade promotions. While size, measured by a number of means, Market power, trade promotion and advertising indicates potential market power, profitability measures a expense: As noted earlier there is considerable firm’s exercised market power and its ability to extract evidence that manufacturers are reducing traditional excess returns from its customers. When high advertising and promotion expenses for more retailerprofitability is used as a measure of high market power, it focused trade promotions (Gomez et al, 2007; Zerrillo captures a firm’s ability to price its product to earn higher and Iacobucci, 1995). The alternative to the market power argument is that trade promotions efficiently diversify the risk of
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