Slotting Allowances as Real Options: An Alternative Explanation

This article offers an alternative explanation for slotting allowances using contingent claims analysis, or real option pricing. Slotting allowances arise because retailers hold call options on their shelf space while suppliers must buy these options to introduce a new product. A simulated model of new-product introduction shows that stocking a new product contains a significant, imbedded real option component. We also show that advertising and promotional support can reduce the real option value.