The Mechanism Of Creation And Pricing Of The Retail Slotting Allowances:a Research Based On Two-sided Market Framework

Slotting allowances or slotting fees is a lump-sum payment which is paid by suppliers to persuade retailers initializing introduction of a new product, and give the product an opportunity to be stored and displayed on retailers’ shelves.There have been dissensions between retailers and suppliers because of the existence of slotting allowances. In retailers’position, they have to gain the payment from suppliers to cover the increasing cost, which is really necessary to attract more consumers or enhancing services in order to survive the competing with rivals. Because, they can’t cover the huge cost by increasing revenue from consumers. But in the opposite position, the suppliers say that, rather than to cover the promotion cost, most of the fees is transferred to the retailers’net profits. Retailers are using slotting allowances as a pressing tool to absorb the suppliers’profits. According to some statistics, the rate of slotting allowances in sales revenue of retailers is8%up to25%, and the highest can reach35%. The financial reports of some Chinese listed retailing companies show that, their profits would be tiny or even negative without the income from slotting allowances. The rate of slotting allowances in revenue from main operation can be up to more than200%. Carrefour, a French retailer, encountered furious revolt of some suppliers because the suppliers considered the level of slotting allowances far more beyond justice. The suppliers,10food manufacturers from a food industry union in Shanghai City, stopped supplying to the34shops of Carrefour. Despite the final settlement, the well-known accident raised a lot of attention to retailers’slotting allowances nationwide for the first time.Are slotting allowances injustice? Did the fees rob the suppliers? What are the influences to consumers’welfare? All the answers depend on deep researching on slotting allowances.Actually, the first sight of slotting allowances can be cast back to1980’s, when too many new products burst out to supermarkets’ shelves. Burst out of new products is considered the direct reason of the creation of slotting allowances in many literatures. Because of the limitation of the amount of shelves’space, supermarkets have to choose only about10%new products of the all to let them in. They asked for slotting allowances to suppliers for the best use of their shelves. And soon after, all the retailers learned to do so until most companies of the world look on slotting allowances as just some kind of tradition in business naturally. Researching conclusion is still in its way. According to the efficiency school, as a mechanism of risk-transmitting and cost-sharing, slotting allowances can speed up the introduction and distribution of new products. And retailers can screen out the most successful new products by the signaling of slotting allowances. On the contrast, the market power school considers the fees a tool, by using which the retailers can put forward some kind of price discrimination to the suppliers. And the using of slotting fees can rise retailing prices and hurt the competitiveness of the market. None of the two schools has been approved enough, and the questions are still here. This situation limited the restrictions on slotting fees from commissions and governments.To capture a new angle of view to slotting fees, this paper put the question under the two-sided market framework, which has been proved really appropriate to platform industry analysis. Two-sided market theories pay attention to some interesting things, that is, some exchanges can only achieved on a platform. The platform supplies products or services at some certain prices to the users of both sides and manage to make the exchange done. This type of market is two-sided market. There are continuous interactions between users of different sides and the attendant of one side users influence the utility of the other side users. Let the sum of prices of two sides holding on, the amount of exchanges achieved on the platform is related to the price structure. This situation is obviously different to traditional one-sided market. In two-sided market framework view, retailers are platforms which manage to achieve the exchanges between consumers and suppliers. And then, Slotting fees can be a part of price structure, that is, the price given to suppliers, who are users of one side of the two. The two-sided market theories consider the slotting fees as a part of the declining price structure, in which one side price is low and the other is high. Different to other theories, two-sided market framework is more systemetic and dynamic because it includes the consideration of the interaction between consumers and suppliers in the research of slotting fees. And thus, the framework is more appropriate to analysis infromational modern huge chain retailers.Given new angles of view and more effective resaerching tools from two-sided market framework, this paper put forward some systemetic research on the creation, the source of value, and the pricing featutes of soltting fees. Firstly, based on the present literatures, this paper redifines the definition and scope of slotting fees. According to this paper, slotting fees are all the payments which are paid outside the goods price to retailers by suppliers to gain opportunities of letting their products be displayed and on sale on retailers’shelves. There are two limitations in this definition. The first, the slotting fees must be outside the goods price. Further, the fees must be paid only for the purpose of letting the products entering, being remained on the shelves and being treated in good way. These limitations can prevent the definition from confusion. Secondly, a so-called historical research on the reason of the creation of slotting fees is on board. Based on analysis on historical materials and literatures, this paper concludes that the purst out of new products in1980’s is but one condition of the creation of slotting fees. The ultimate reason of that is related to the big changes of retailers themselves, that is, the applications of bar code, laser scanner, multi-functional POS sysms, and large database techniqus, by which the big modern retailers are far more different to traditional retailers, such as department stores or grocers. The big modern retailers can grasp a lot of consumer information by using the modern devices and then response the market trends accurately and rapidly. They have showed the features of platform industries at that time. Thus this paper concludes that, the pacing close to the platform features of modern big retailers is the ultimate reason of slotting fees’creation in1980’s. Then there is an empirical research based on the data from Chinese listed companies’quarterly financial reports trying to validate the efficiency school or the market power school. The empirical outcome surprisingly shows that the slotting fees have rather than negative press on suppliers’ profits, but positive influences on suppliers’profits. Obviously, this result leans to the efficiency school rather than the market power school. But because there is no posibility to measure the slotting fees directly, this paper has to use alternative substitute target. Thus the result might not be stable enough. Although, based on the empirical resunlt, a hypothesis of the value source of slotting fees is brought forward. Since the slotting fees come from neither the reduction of consumers’welfare nor the reduce of suppliers’profits, given the two-sided market framework suggestions, this paper draws the hypothesis, so-named the surplus of network externalities hypothesis. This hypothesis says that the value of slotting fees comes from the surplus of network externalities which are created by the platform, the retailers. In the next part of this paper, some pricing models based on present two-sided market research works are set to show perspective of slotting fees pricing. The models are initialized in the same way as in the present literature, including the set of variables. The demand-pice elasticity, the cross-group network externalities parameter, the number and homing features of users are key variables in these models. In the last part of the paper is the discussion about how to restrict the abuse of slotting fees. According to this paper, neither the market dominance theories nor the abuse of maket superior status theories is more appropriate than the two-sided markt framework to describe the situations in nowadays retailing market. Closely based on the two-sided market features of retail market, a serie of suggestions on how to restrict the abuse of slotting fees is given.Some innovative viewpoints in this paper are as follows:Firstly, a new explanation on how slotting fees are generated is given under the two-sided market theory framework. The present theories consider the burst out of new products in1980’s to be the main reason of coming out of the retail slotting fees. But they can’t explain why the fees are still exist when the burst out of new products have been cooled down. Further more, the range of products which are paid the fees is far beyond "new products", which suggests that there maybe other reasons of the fees’ existing. Enlightened by the two-sided market theories, this paper notes two big changes in retail industry in1980’s. One change is that the retailers are more and more big sized and chained. The other, they are having effective electric and informational tactics (barcode scanning and database systems). The two big changes allow the retailers to be a kind of platforms which are far more different from traditional retailers. In the two-sided market viewpoint, modern retailers are obviously platforms, which face two-sided markets but not one-sided markets. Thus the slotting fees can be a part of leaning pricing structure in a two-sided market. So this paper draws that it is the emerging of retail platforms that allows the slotting fees’ existing.Secondly, based on not only the empirical analysis but also the theoretical analysis, this paper suggests "the surplus of network externalities hypothesis" to try to explain the value source of slotting fees. Logically, the value of slotting fees come from either the higher prices given to consumers or the lower profits the suppliers gained. But according to this paper, neither of the two sources is proved. The financial analysis to some Chinese listed companies show that the slotting fees even have positive influences rather than negative influences on the suppliers’profits. Then "the surplus of network externalities hypothesis" is drawn, which presumes that the surplus of network externalities which is generated by the retail platforms is the value source of slotting fees.Finally, based on the two-sided market viewpoints, this paper gives a series of new regulation suggests to restrict slotting fees practices. Even though the economists, the managerial experts, the law researchers, the trade commissions and the policy makers have been noticing the slotting fees and have been taking some restrictions, but the restrictions are not fit the slotting fees well. It is the analysis based on two-sided market theories that can describe the modern retailing market situations exactly and appropriately. In the two-sided market point of view, slotting fees can be the rational pricing practice rather than simple monopoly pricing practice. And thus, some new regulation routs ahead can be seen.