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Explicit Evidence on an Implicit Contract

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  • Andrew T. Young

    (University of Mississippi)

  • Daniel Levy

    ()
    (Bar-Ilan University)

Abstract

We offer the first direct evidence of an implicit contract in a goods market. The evidence we offer comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. In general, observing implicit contracts directly is difficult because of their implicit nature. In the case of Coca-Cola, however, we are able to document the Company not only saying that it had an important implicit contract with its consumers, but also acting on it. This study makes an additional and unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. We present evidence that the implicit contract included a promise not only of a constant nominal price but also a constant quality. We document the dedication to a 6.5oz serving of the "Secret Formula." Indeed, during a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Coca-Cola Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. In addition, we are able to offer one piece of direct evidence on the magnitude of these costs by studying the events surrounding the failed introduction of the New Coke in 1985.

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Bibliographic Info

Paper provided by Bar-Ilan University, Department of Economics in its series Working Papers with number 2005-04.

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Date of creation: Jun 2005
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Handle: RePEc:biu:wpaper:2005-04

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Keywords: Implicit Contract; Explicit Contract; Invisible Handshake; Customer Market; Long-Term Relationship; Price Rigidity; Coca-Cola; Nickel Coke;

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References

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Citations

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Cited by:
  1. Georg Mueller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2006. "Holiday Nonprice Rigidity and Cost of Adjustment," Emory Economics 0612, Department of Economics, Emory University (Atlanta).
  2. Alexander L. Wolman, 2000. "The frequency and costs of individual price adjustments," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-22.
  3. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2007. "Non-price rigidity and cost of adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 817-832.
  4. Levy, Daniel, 2007. "Price Rigidity and Flexibility: New Empirical Evidence," MPRA Paper 2762, University Library of Munich, Germany.
  5. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments," MPRA Paper 2761, University Library of Munich, Germany.
  6. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.
  7. Andrew T. Young & Alexander K. Blue, 2007. "Retail prices during a change in monetary regimes: evidence from Sears, Roebuck catalogs, 1938-1951," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 763-775.

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