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Slotting Allowances and Product Variety in Oligopoly Markets

Slotting fees are fixed charges paid by food manufacturers to retailers for access to the retail market. The role of the practice and its effects on market efficiency are highly controversial. While the literature to date has largely focused on the effect of the practice on retail prices, it is also clear that slotting allowances have the potential to alter product variety in the market equilibrium. Our analysis reveals that the strategic use of slotting allowances by oligopoly firms increases both equilibrium retail prices and equilibrium product variety in the market. Absent slotting allowances, variety is undersupplied relative to the socially optimal resource allocation. We isolate this variety distortion by considering a class of models in which heterogeneous consumers have unit demand for their most desired product variant and demonstrate that equilibrium slotting fees restore the socially optimal level of product variety in the market equilibrium.