Category captainship

Abstract

It is commonplace for retailers to rely on input from one of their suppliers, a “category captain”, when making some of their decisions, such as which products to stock and how to allocate shelf space. There is some concern that category captains may offer biased advice that favors their own position. The 2000 and 2008 UK Competition Commission reports on the grocery industry identified concerns about the fact that in some arrangements the category captain (not the retailer) made the decisions on the allocation of shelf space. In a more recent investigation into Tesco PLC (2016), the Groceries Code Adjudicator, Christine Tacon, revealed that suppliers are in many cases paying large sums of money to retailers to become captains. “If large sums are being paid […] it suggests that the supplier must believe that it is obtaining significant financial benefits […] from the arrangement.” In this paper, we analyze a retailer’s incentives to rely on the advice of a category captain about which products to stock. We find that such an arrangement can be mutually beneficial for the retailer and the captain – even if the retailer knows that the captain will sometimes give bad advice. Moreover, we find that, even if the retailer could incentivize the captain to always be truthful, the retailer in fact does not want to do so. We also show that the retailer has an incentive to appoint “dominant” manufacturers as captains – specifically, manufacturers with higher expected demands and/or with less uncertain demands. It may appear from our results as though category captain arrangements are harmful to the captain’s smaller rivals. Yet, we find that, overall the captain’s rivals may expect to benefit from the arrangement, even if they are harmed by the captain’s influence in isolated cases. This may explain why we observe relatively few complaints from competitors about category captainships.