NIE and The Economics
of Slotting Contracts
Phil Weiser
June 4, 2009
I.
Coase
• Ronald Coase
– British Economist
– Born December 29,
1910
– Won Nobel
Memorial Prize in
Economics in 1991
– The Problem of
Social Cost, 1960
– The Nature of the
Firm, 1937
II. The Theory of the Firm
• Firms make decisions to rely on the market or
internal operations (i.e., build, lease, or buy).
• These decisions are driven, primarily, by
transaction costs—e.g., search costs,
information costs, bargaining costs, keeping
trade secrets, and enforcement costs.
• Vertical integration can address a particular type
of transaction cost—a fear of hold-out.
• There are other protections against hold-out
concerns, including contractual safeguards (e.g.,
“trading hostages”).
III. NIE and Antitrust Law
• NIE has provided a tool for enabling
antitrust law to re-think its traditional
skepticism of vertical arrangements.
• NIE also, like antitrust law, calls for a
careful evaluation of actual institutional
arrangements.
– As to supermarkets, the use of slotting
arrangements has given rise to quip that
“supermarkets don’t sell food, they sell shelf
space.”
IV. Efficiency Explanations of
Slotting Arrangements
• Provides a means of “signaling” from manufacturers as
to what products they have that are more profitable.
• Large payments—as opposed to product discounts—
allows for experimentation on how supermarkets spend
the rents generated by slotting contracts.
• Because slotting contracts are used by firms with market
power and firms without it, that strong suggests that they
are based on efficiency, and not exclusionary, grounds.
See Michael Levine (on airline price discrimination).
• The supermarket as a good steward of its platform and
can be trusted to serve consumers. See, e.g., iPhone.
• NOTE—the ability to avoid paying slotting fees—as
argued in FTC v. H.J. Heinz Co.—is not an efficiency.
V. Questions
• NIE focuses on transaction costs and its impact on decision to
vertically integrate.
– Do slotting contracts overcome transaction costs and do they relate to
decisions to vertically integrate—i.e., be one’s own distributor?
• A classic competition policy concern is the presence of barriers to
entry and the Internet is praised as an inviting environment for entry.
– In old world, before slotting contracts, did retailers provide free
advertising to brands they liked? How do you explain that PNOS stores
(e.g., Whole Foods) still do?
– The use of slotting contracts could be a screening device, but might
they stifle creativity and will reliance on them wane if lead to consumerunfriendly offerings? See, e.g, the fall-out of fin-syn rules.
– Should we worry about institutional arrangement that may real efficiency
benefits, but also make entry more difficult? See, e.g., Barry Nalebuff;
but see Honest Tea.
• Under what circumstances should we worry about vertical practices
that are adopted across an industry—e.g., if there are high levels of
market concentration?