Thursday, October 23, 2008

Slotting Allowances Anti-Competitive?

Yesterday, the Antitrust & Competition Policy Blog posted about a recent article by Oystein Foros and Hans Jarle Kind entitled “Do Slotting Allowances Harm Retail Competition?”

Slotting fees - paid by manufacturers to retailers for access to shelf space for their products – have increased significantly in recent years, at the same time that the grocery industry has seen increasing consolidation. The Foros & Kind article examines competing views over whether slotting fees are anti-competitive:

  • One view suggests that the fees are anti-competitive, as up-front payments in the form of slotting fees leads to a higher wholesale price. When retailers pay higher marginal product costs, they are less likely to discount aggressively, and they signal to competitors that they will be a soft competitor on price. This leads competitors to increase prices to end users.

  • The competing view suggests that slotting fees are pro-competitive because they help allocate limited shelf space and address the problem of asymmetric information.

Group Purchasing - Foros and Kind argue that these views fail because they don’t take into account the group purchasing practices that many retailers engage in through co-ops and other group purchasing arrangements, especially in Europe. While retailers band together in negotiating whole prices with retailers, they each set their own retail prices. Within the purchasing group, where each member of the group presumably knows what the purchasing terms are, Foros and Kind suggest that slotting fees are used to dampen competition between rival retailers.

FTC Concerns - In prior years, the Federal Trade Commission has expressed concerns about slotting fees and has convened hearings and published reports on slotting fees, including a 2003 report and a 2001 report. The FTC and antitrust practitioners have expressed two principal concerns involving slotting fees: (1) that the fees represent coordinated – and possibly even collusive – pricing by retailers, and (2) that the fees increase barriers to entry for the introduction of new, innovative products. The principal business rationale for slotting fees is that the fees help defray the cost and business risk of new product introduction – i.e., products that do not have a track record of sales volume. That is, the fees help compensate retailers for betting on the future success of new products with no historical sales volume by including the products in planograms and shelf sets.

Price Discrimination - While substantial attention has been devoted to assessing the antitrust implications of slotting fees, commentators and the government often focus on the relatively simple antitrust issues associated with slotting – i.e., whether the fees are a result of collusion or impede entry of new products – but fail to grapple with a much more complicated issue: whether slotting fees give rise to price discrimination concerns under the Robinson Patman Act. Not all retailers and wholesalers charge slotting fees. Price discrimination concerns arise when a vendor pays slotting fees to one retailer, but not the retailer’s competitor. If the vendor does not reduce its product pricing to the retailer’s competitor by the amount of the slotting fee given to the retailer, paying the retailer’s slotting fee may violate the Robinson-Patman Act. For this reason, we believe that, in assessing the legality of slotting fees under the antitrust laws, the fees must be considered along with other discounts and allowances vendors give retailers and wholesalers.

Pricing Issues - The complicated and often opaque nature of pricing – both retail and wholesale – creates opportunities for antitrust and fraud violations. Kotchen & Low LLP is currently representing a class of state and local governmental entities who paid fraudulently inflated wholesale prices, and is representing classes of grocery retailers and manufacturers who were overcharged for services because of an antitrust conspiracy. In each case, the potential damages are substantial, underscoring the need for vigilance – both by sellers in ensuring their pricing practices comply with the law, and by purchasers in ensuring that they are not paying unlawfully inflated prices. If you have concerns about pricing practices, you should consider contacting an attorney.


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