The Economics of Bargaining between Manufacturers and Retailers: When Do Slotting Fees Arise?

Abstract

This paper investigates when do slotting fees arise as outcomes of the bargaining process between manufacturers
and retailers. An asymmetric Nash bargaining model is used to investigate the economics of slotting fees obtained
from bilateral negotiations about two-part tariff contracts. The analysis applies to an arbitrary number of
manufacturers and retailers, and holds under general technology and product differentiation conditions. We show
how scale economies in retail revenue and complementarity contribute to the existence of slotting fees. Such results
apply irrespective of the retailer bargaining power. They indicate that observed variations in the existence and
magnitude of slotting fees across products and market conditions are driven by variations in complementarity and
economies of scale in retail revenue.
Keywords: Bargaining, Slotting fees, Two-part tariff, Vertical channel.