Slotting Fees and Price Discrimination in Retail Channels

We consider a manufacturer's optimal contract design in the presence of asymmetric retailers. We first solve for the case in which the manufacturer can overtly discriminate between its retailers by offering each a different two-part tariff contract. We then compare it to the case in which overt discrimination is not feasible and the manufacturer must instead induce self-selection. We find that whereas there is no role for slotting fees when overt discrimination is possible, slotting fees can arise as part of the equilibrium menu of contracts offered to both retailers in the absence of such discrimination. It is found that the large retailer always prefers the contract with the lower wholesale price, even if it means not accepting a slotting fee, whereas the small retailer always accepts the largest slotting fee offered, even though it means taking on the contract with the higher wholesale price. Our results also suggest that the wholesale prices (and hence retail prices) of both retailers will be uniformly higher when overt discrimination is infeasible.