The availability of a new product in a store creates, through word-of-mouth advertising, an informative spillover that may go beyond the store itself. We show that, because of this spillover, each retailer is able to extract a slotting fee from the manufacturer, at product introduction. Slotting fees may discourage innovation by an incumbent or an entrant and in turn harm consumer surplus and welfare. We further show that a manufacturer is likely to pay lower slotting fees when it can heavily advertize or when it faces a larger buyer. Finally, we prove that our results hold when introducing retail competition, when firms are forward looking and when the innovator is a potential entrant rather than an incumbent.
KeyWords: Buyer Power, Innovation, Informative Advertising, Slotting Fees.
JEL codes: L13, L42, M37.