Slotting Allowances, Failure Fees and Asymmetric Information in the Grocery Supply Chain

Abstract

Mechanism design framework and two moments of the product demand distribution are utilized to eliminate mean-variance dominated products and separate non-dominated products by their demand distributions. Model results suggest that accurately designed menus of contracts including retail prices, slotting allowances, failure fees (or success rebates) and sales targets can separate products by their demand distributions and alleviate asymmetric information problems. Adverse selection problems can be reduced by utilizing such mechanisms to align incentives for retailers and manufacturers when shelving new product introductions.