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Consumer Shopping Costs as a Cause of Slotting Fees: A Rent-Shifting Mechanism

Stephane Caprice and Vanessa von Schlippenbach

No 1012, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Analyzing a sequential bargaining framework with one retailer and two suppliers of substitutable goods, we show that slotting fees may emerge as a result of a rent-shifting mechanism when consumer shopping costs are taken into account. If consumers economize on their shopping costs by bundling their purchases, their buying decision depends rather on the price for the whole shopping basket than on individual product prices. This induces complementarities between the goods offered at a retail outlet. If the complementarity effect resulting from shopping costs dominates the original substitution effect, the wholesale price negotiated with the first supplier is upward distorted in order to shift rent from the second supplier. As long as the first supplier has only little bargaining power, she compensates the retailer for the upward distorted wholesale price by paying a slotting fee. We also show that banning slotting fees causes per- unit price to fall and welfare to increase.

Keywords: Shopping costs; rent-shifting; slotting fees (search for similar items in EconPapers)
JEL-codes: L22 L42 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2010
New Economics Papers: this item is included in nep-com and nep-ure
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