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Explicit Evidence of an Implicit Contract

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  • Andrew T. Young
  • Daniel Levy

    ()
    (Bar-Ilan University)

Abstract

We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers—a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the “secret formula,” at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude that the perceived costs of breaking the implicit contract were large.

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Bibliographic Info

Paper provided by Department of Economics, Bar-Ilan University in its series Working Papers with number 2013-06.

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Length: 45 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:biu:wpaper:2013-06

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Postal: Faculty of Social Sciences, Bar Ilan University 52900 Ramat-Gan
Phone: Phone: +972-3-5318345
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Web page: http://econ.biu.ac.il
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Keywords: Implicit Contract; Explicit Contract; Invisible Handshake; Customer Market; Long-Term Relationship; Price Rigidity; Sticky Prices; Price Adjustment; Quality Rigidity; Quality Adjustment; Nickel Coke; Coca-Cola; Secret Formula; Real Thing;

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References

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Citations

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Cited by:
  1. Georg Muller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2006. "Holiday Non-Price Rigidity and Cost of Adjustment," Working Papers 2006-4, Department of Economics, Bar-Ilan University.
  2. 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.
  3. Daniel Levy, 2006. "Price Rigidity and Flexibility: New Empirical Evidence," Emory Economics 0611, Department of Economics, Emory University (Atlanta).
  4. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments," MPRA Paper 2761, University Library of Munich, Germany.
  5. Alexander L. Wolman, 2000. "The frequency and costs of individual price adjustments," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-22.
  6. 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.
  7. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.

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