The law and economics of slotting arrangements and category management

Manufacturers frequently rely on distributors for active promotion of the manufacturer's product. Without some contractual requirement, distributors will not take into account the manufacturer's profit on incremental sales when making their decisions regarding the level of promotional effort to supply. Rather than leaving the decision to retailers who will undersupply promotional effort, manufacturers and retailers attempt to solve this problem by entering marketing arrangements enhancing the transactors' joint profitability. These contracts have two major features: (1) the retailer compensation mechanism for provision of those services; and (2) the quantity and quality of promotional effort "paid" to the manufacturer by the retailer.; This paper applies the promotional services theory in Klein & Murphy (1984) to analyze the manufacturer and retailer sides of a distribution contract. On the retailer compensation side of the contract, the paper analyzes the economic function of slotting allowances relative to other compensation mechanisms providing a premium stream to retailers for the provision of promotional effort, i.e. RPM with a reduced wholesale price.; On the manufacturer side of the distribution arrangement, the retailer might bind itself to promote the retailer's product in a number of ways, including exclusivity, granting the manufacturer a fixed percentage of the category shelf space, or designating the manufacturer as "category captain." This paper takes explains not only the role of exclusivity in distribution contracts, but also extends that analysis to explain the economics of category management, a business practice adopted by retailers that separates a multi-product store into product categories.; Finally, the paper addresses the antitrust doctrine applied to both slotting allowances and category management in light of the economic insights provided by the paper by considering recent antitrust decisions. In particular, the Sixth Circuit's affirmance of a {dollar}1.05 billion verdict in Conwood Co. v. United States Tobacco Co. is analyzed in light of the promotional services theory presented in this paper and its application to category management.