NO. E2008002 December 22, 2008
When in-store display influences consumer choices, shelf space allocation can be strategically used by retailers to extract payments from manufacturers. The paper finds that manufacturers with more popular brands have higher willingness-to-pay for the premium shelf spaces of supermarkets. Shelf space fees soften inter-brand competition and result in higher sale-weighted average retail price as well as inter-brand price differences. The fees increase the industry profit but lower the upstream profit. Both the aggregate consumer surplus and social welfare are negatively affected. This paper suggests that even when the fees do not drive small manufacturers out of retail stores, they might still be anti-competitive.