The Role of Slotting Fees in the Coordination of Assortment Decisions

Large numbers of new products introduced annually by manufacturers may strain the relationship between retailers and manufacturers regarding assortments carried by retailers. For example, many retailers in the grocery industry will agree to broaden their assortments only if the manufacturer agrees to pay slotting fees for the new products. We investigate the role played by slotting fees in coordinating the assortment decisions in a supply chain. To do so, we study a single‐retailer, single‐manufacturer supply chain, where the retailer decides what assortment to offer to end customers. Double marginalization results in a discrepancy between the retailer's optimal assortment and the assortment that maximizes total supply chain profits. We consider a payment scheme that is analogous to slotting fees used in the grocery industry: the manufacturer pays the retailer a per‐product fee for every product offered by the retailer in excess of a certain target level. We show that, if the wholesale price is below some threshold level, this payment scheme induces the retailer to offer the supply‐chain‐optimal assortment and makes both parties better off.