New Product Introduction and Slotting Fees

The availability of a new product in a store creates an informative spillover that extends past the store itself through word-of-mouth advertising. Because of this spillover, each retailer is able to extract a slotting fee from the manufacturer at product introduction. Slotting fees may discourage innovation by the manufacturer and, in turn, reduce consumer surplus and social welfare. A manufacturer is more likely to pay lower slotting fees when it can advertise more heavily, or when it faces a larger buyer. These results are robust to variations in retail competition, firms' discount factors, and the identity of the innovating firm.