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Effect of the Slotting Process to Competition Assignment

The slotting process refers to a payment from a manufacturer to a retailer in consideration of the retailer stocking the manufacturer’s product (O’Donoghue and Padilla, 2006). This may be described as rent or simply a fixed fee. The precise characterization is unimportant; the key point is that the retailer receives some payment for shelf space. Generally, retailers soliciting rents in the form of fees or allowances is of no concern under competition law: retailers should be allowed to charge for marketing services.

However, in certain cases, it may be that such schemes could be used by dominant firms to acquire exclusivity or to tie up enough of the available shelf space to preclude other competitors from entering or expanding into the market. The slotting process may therefore increase rivals’ cost, which could in turn result in higher prices to consumers.

In particular, the slotting process serves a strategic role in dampening downstream competition, generating higher retail process and profits. Slotting allowances offer retailers a direct up-front payment, but provide an indirect benefit by committing retailers to accept a wholesale price above a manufacturer’s production marginal cost, which raises retail prices. The effect of slotting allowances on small manufacturers is controversial, as is the effect on consumers.

Three sources of potential harm to consumers are: (1) reduced competition among manufacturers which may lead to higher wholesale prices passed on to consumers; (2) reduced competition among manufacturers which might lead to reduced variety or investment in quality; and (3) buying power among retailers might be exercised in the form of slotting allowances, which improve the retailers; profits without being passed on to consumers. All these possibilities are problematic.

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As to the first, brands usually become dominant because of superior quality or attractiveness and it would be hard to distinguish those effects from reduced competition. Some wonder whether consumers have more variety than they need, and some retailers pass on part of lump sum payments to consumers. However, some also accepted, however, that slotting fess led to efficiencies and should not be condemned without the application of a full rule of reason.

They should not be automatically treated as illegal, proof should be required that the effects are exclusionary. The slotting process should generally be analyzed under similar principles to exclusive dealing. Clearly, however, they merit less strict treatment in the absence of any express exclusivity commitment. A key condition for treating the slotting process as potentially abusive is that they contain some objectionable clause or feature beyond mere payment for shelf space.

Problems should only arise when the slotting process: (1) requires exclusive shelf space; (2) ties up an exclusionary percentage share of shelf space devoted to a specific product category; (3) limits competitors to a specific number of units; (4) exclude specific competitor units; (5) requires some form of price parity with competitors; (6) specify when and how competitors can advertise; and (7) includes an English clause. Even then, all of the principles for the analysis of exclusive dealing requirements – in particular the need to show a material actual or likely exclusionary effect – also apply to the slotting process.

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