Postprint version. Published in American Journal of Agricultural Economics, Volume 85, Issue 4, November 1, 2003, pages 797-813. Copyright © 2003 Agricultural and Applied Economics Association. Published by Blackwell. The definitive version is available at http://dx.doi.org/10.1111/1467-8276.00489.
NOTE: At the time of publication, the author Stephen Hamilton was not yet affiliated with Cal Poly.
Slotting allowances, which are lump-sum transfers paid by food manufacturers to grocery retailers in return for various retail concessions, are becoming increasingly common in wholesale grocery markets. This article extends the literature on slotting allowances by considering two features that previously have been ignored: the role of food processors in determining these pricing arrangements, and the effect of slotting allowances on the size and distribution of economic surplus. Slotting allowances motivated by food processors increase procurement quantities and farm prices, and this raises farm surplus, increases total producer surplus, and improves consumer welfare in the food system.