Shelf Pricing

Bob Michaels wrote to chide me for linking in my post on peanut butter to the “Consumers Union item that treats slotting allowances and similar store placement charges as another instance of big producers stomping on small ones.”

In my defense, linking doesn’t imply approval! (I linked only as a source for the claim that the typical supermarket has 30,000 items.) Bob, however, gives an excellent analysis of shelf pricing:

[Shelf pricing] is one of the few documented cases (compared with the parlor games in intermediate textbooks) where asymmetric information arguments may make sense. Assume that a producer of grocery items has created several products and wants stores to sell them. The producer has information from marketing surveys, etc. that most of these are non-starters, but may nevertheless be able to recover some of their costs from wholesale sales to grocers who only learn from experience that the goods are losers. Faced with far more potentially marketable items than it can possibly evaluate in detail, the grocer needs access to the market research that makers of the new products probably have but do not want to divulge. The solution: make them put up a nonsalvageable investment of the type frequently seen — force them to rent shelf space, purchase and dispose of the items whose space they are replacing, or make them commit to joint advertising efforts. The maker of the products will only place such a bet on a product that it seriously believes will sell well.


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