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NIE and The Economics of Slotting Contracts

NIE and The Economics of Slotting Contracts. Phil Weiser June 4, 2009. I. Coase. Ronald Coase British Economist Born December 29, 1910 Won Nobel Memorial Prize in Economics in 1991 The Problem of Social Cost, 1960 The Nature of the Firm, 1937. II. The Theory of the Firm.

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NIE and The Economics of Slotting Contracts

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  1. NIE and The Economics of Slotting Contracts Phil Weiser June 4, 2009

  2. I. Coase • Ronald Coase • British Economist • Born December 29, 1910 • Won Nobel Memorial Prize in Economics in 1991 • The Problem of Social Cost, 1960 • The Nature of the Firm, 1937

  3. II. The Theory of the Firm • Firms make decisions to rely on the market or internal operations (i.e., build, lease, or buy). • These decisions are driven, primarily, by transaction costs—e.g., search costs, information costs, bargaining costs, keeping trade secrets, and enforcement costs. • Vertical integration can address a particular type of transaction cost—a fear of hold-out. • There are other protections against hold-out concerns, including contractual safeguards (e.g., “trading hostages”).

  4. III. NIE and Antitrust Law • NIE has provided a tool for enabling antitrust law to re-think its traditional skepticism of vertical arrangements. • NIE also, like antitrust law, calls for a careful evaluation of actual institutional arrangements. • As to supermarkets, the use of slotting arrangements has given rise to quip that “supermarkets don’t sell food, they sell shelf space.”

  5. IV. Efficiency Explanations of Slotting Arrangements • Provides a means of “signaling” from manufacturers as to what products they have that are more profitable. • Large payments—as opposed to product discounts—allows for experimentation on how supermarkets spend the rents generated by slotting contracts. • Because slotting contracts are used by firms with market power and firms without it, that strong suggests that they are based on efficiency, and not exclusionary, grounds. See Michael Levine (on airline price discrimination). • The supermarket as a good steward of its platform and can be trusted to serve consumers. See, e.g., iPhone. • NOTE—the ability to avoid paying slotting fees—as argued in FTC v. H.J. Heinz Co.—is not an efficiency.

  6. V. Questions • NIE focuses on transaction costs and its impact on decision to vertically integrate. • Do slotting contracts overcome transaction costs and do they relate to decisions to vertically integrate—i.e., be one’s own distributor? • A classic competition policy concern is the presence of barriers to entry and the Internet is praised as an inviting environment for entry. • In old world, before slotting contracts, did retailers provide free advertising to brands they liked? How do you explain that PNOS stores (e.g., Whole Foods) still do? • The use of slotting contracts could be a screening device, but might they stifle creativity and will reliance on them wane if lead to consumer-unfriendly offerings? See, e.g, the fall-out of fin-syn rules. • Should we worry about institutional arrangement that may real efficiency benefits, but also make entry more difficult? See, e.g., Barry Nalebuff; but see Honest Tea. • Under what circumstances should we worry about vertical practices that are adopted across an industry—e.g., if there are high levels of market concentration?

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