Defending and improving the 'slotting fee': how it can benefit all the stakeholders dealing with a newsvendor product with price and effort-dependent demand

Abstract

Slotting fee (hereafter SF) is an upfront fee a supplier is required to pay a retailer in order to have his product sold on the retailer's shelves. It is becoming increasingly common, but also widely reviled. This paper considers a newsvendor product whose expected demand is dependent on retail price and sales effort. The question we pose is: given that the Stackelberg-dominant retailer has to choose a pricing contract with which she transacts with the supplier, how would the supply-chain stakeholders fare when the retailer implements SF instead of another practical pricing contract? We show that, contradicting its negative public image, SF empowers the dominant retailer to specify contract terms that will benefit all the stakeholder-groups. That is, the supplier's and the retailer's profits are higher, the production workers are asked to produce more, and the consumers pay a lower retail price. We also propose a new composite contract format that incorporates both the SF and buyback features. This composite format empowers the retailer to provide even greater benefits to the supply-chain's stakeholders. © 2012 Operational Research Society Ltd. All rights reserved.