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Explicit Evidence on an Implicit Contract

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Author Info
Andrew T. Young
Daniel Levy ()

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Abstract

We offer the first direct evidence of an implicit contract in a well-known product market—the market for Coca-Cola. 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 impossible 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 the 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 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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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0519.

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Date of creation: Jun 2005
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Handle: RePEc:emo:wp2003:0519

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  1. Jean-Robert Tyran & Elke Renner, 2003. "Price Rigidity in Customer Markets," University of St. Gallen Department of Economics working paper series 2003 2003-16, Department of Economics, University of St. Gallen. [Downloadable!]
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  2. Durlauf, Steven N., 2001. "Manifesto for a growth econometrics," Journal of Econometrics, Elsevier, vol. 100(1), pages 65-69, January. [Downloadable!] (restricted)
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  4. Daly, Herman E, 1970. "Some Observations on the Causes and Consequences of the Shortage of Change in Northeast Brazil," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 181-84, Jan.-Feb.. [Downloadable!] (restricted)
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  7. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November. [Downloadable!] (restricted)
  8. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Macroeconomics 0402020, EconWPA. [Downloadable!]
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  9. Julio J. Rotemberg, 2004. "Fair Pricing," NBER Working Papers 10915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Alan Kackmeister, 2005. "Yesterday's bad times are today's good old times: retail price changes in the 1890s were smaller, less frequent, and more permanent," Finance and Economics Discussion Series 2005-18, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Rotemberg, Julio J., 2005. "Customer anger at price increases, changes in the frequency of price adjustment and monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 829-852, May. [Downloadable!] (restricted)
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  15. Simon Hall & Mark Walsh & Anthony Yates, . "How do UK companies set prices?," Bank of England working papers 67, Bank of England. [Downloadable!]
  16. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February. [Downloadable!] (restricted)
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  17. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
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  18. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August. [Downloadable!] (restricted)
  19. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  20. David Genesove, 2003. "The Nominal Rigidity of Apartment Rents," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 844-853, 09. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments," MPRA Paper 2761, University Library of Munich, Germany. [Downloadable!]
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  2. Maarten Dossche, 2009. "Understanding inflation dynamics : Where do we stand ?," Research series 200906-11, National Bank of Belgium. [Downloadable!]
  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. [Downloadable!]
  4. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552. [Downloadable!]
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  5. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647. [Downloadable!]
    Other versions:
  6. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2006. "Holiday Non-Price Rigidity and Cost of Adjustment," Emory Economics 0612, Department of Economics, Emory University (Atlanta). [Downloadable!]
  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. [Downloadable!]
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