A slotting allowance (or slotting fee) is a cash incentive paid by manufacturers to retailers to stock up on products and display it prominently to stimulate its sales. The Korea Fair Trade Commission (KFTC) prohibited slotting allowances that are irrelevant to sales promotion in October, 2013. The main goal of the KFTC’s regulation is to lighten small- and medium-sized manufacturers’ (SMMs’) burden of slotting allowance payments.

The purpose of this study is to evaluate the regulatory policy of slotting allowances. In particular, we analyze the effects of the regulation on SMMs’ profits. To that end, we try to answer the following three questions:

Q1: Are there economic functions of slotting allowances other than sales promotion?
Q2: Do slotting allowances hinder competition and make consumer prices go up?
Q3: Is the regulatory policy of slotting allowances conducive to SMMs?

The main results of the study can be summarized as follows: First, slotting allowances have various functions (including sales promotion) that enhance the efficiency of trade between retailers and manufacturers. For example, manufacturers can use slotting allowances to signal the quality of their products or to offer retailers incentives to provide shelf spaces. Also, slotting fees can be paid for volume purchases.

Second, using retail price data for products that pay higher slotting fees, we examine whether or not anti-competitiveness of slotting allowances can be supported by the data. To that end, we conduct a t-test to see if there is a statistically significant difference in the means of relative prices during the pre- and post-regulation periods. At the 5% significance level, we do not have enough evidence to conclude that there is a difference in the means of relative prices between the two periods. Thus, it is not evident that slotting allowances raise retail prices and therefore are anti-competitive.

Finally, we consider the situation where a large manufacturer and a SMM can strategically pay slotting fees to obtain a large retailer's shelves. It enables us to analyze the effects of the regulation on a SMM whom the KFTC seeks to protect. The main result is that the regulation of slotting allowances can lower a SMM's profit because a strategy of slotting allowance payment is more advantageous to a SMM who produces a product with low brand awareness.

The policy implication from this study is that the KFTC needs to provide a wider definition of slotting allowances and allow for it. In addition, the purpose and need of the slotting fee regulation should be reconsidered.