Slotting allowances, failure fees and asymmetric information in the grocery supply chain

In the presence of scarce shelf space, retail grocers, face the proliferation of new products and high new product failure rates. Accurately predicting the demand for a new product becomes increasingly difficult for retailers as the number of new product offerings increase. This study explores terms of trade, including slotting allowances and failure fees, as mechanisms to screen new products' demand distributions.; Asymmetric information is present in the retailer/manufacturer relationship surrounding new product introductions. Manufacturers often have information about the product and its demand distribution, but may not credibly relay that information to retailers. Retailers lack reliable demand estimates when stocking new products and make shelving decisions under asymmetric information about consumer demand. This asymmetric information scenario creates adverse selection problems for retailers when shelving new products.; Mechanism design framework and two moments of the product demand distribution are utilized to eliminate mean-variance dominated products and separate non-dominated products by their demand distributions. Model results suggest that accurately designed menus of contracts including retail prices, slotting allowances, failure fees (or success rebates) and sales targets can separate products by their demand distributions and alleviate asymmetric information problems. Adverse selection problems can be reduced by utilizing such mechanisms to align incentives for retailers and manufacturers when shelving new product introductions.