Vertical Contracts with Endogenous Product Selection: An Empirical Analysis of Vendor Allowance Contracts

Producers frequently provide retailers with financial incentives to secure product distribution. These payments often take the form of vendor allowances: lump-sum transfers to retailers that do not directly depend on quantity sold. I introduce an estimation strategy that uses observed product selections to inform unobserved allowances. I use retailers' replacement threats, which may allow them to capture both vendor transfers and lower wholesale prices. A counterfactual restricts firms to contract on only wholesale prices. Results show that vendor allowances may have not only (negative) product distortion effects but also (potentially positive) pricing effects.

Automated summary

This study examines how producers incentivize retailers through vendor allowances and explores the potential effects on product distortion and pricing. The author introduces an estimation strategy using observed product selections to uncover unobserved vendor allowances. Results suggest that vendor allowances may have both negative effects on product distortion and potentially positive effects on pricing.