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Explicit Evidence on an Implicit Contract

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Author Info
Andrew Young (University of Mississippi)
Daniel Levy (Bar- Ilan University)

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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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File URL: http://129.3.20.41/eps/mac/papers/0506/0506008.pdf
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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0506008.

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Length: 33 pages
Date of creation: 09 Jun 2005
Date of revision: 24 Jan 2006
Handle: RePEc:wpa:wuwpma:0506008

Note: Type of Document - pdf; pages: 33
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Web page: http://129.3.20.41

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

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Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics

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References listed on IDEAS
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Cited by:
(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!]
    Other versions:
  2. 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!]
  3. 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!]
    Other versions:
  4. 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:
  5. 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!]
  6. 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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