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Explicit Evidence on an Implicit Contract

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  • Andrew 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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File URL: http://128.118.178.162/eps/mac/papers/0506/0506008.pdf
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Bibliographic 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://128.118.178.162

Related research

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. Daniel Levy, 2006. "Price Rigidity and Flexibility: New Empirical Evidence," Emory Economics 0611, Department of Economics, Emory University (Atlanta).
  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. 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.
  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.
  5. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.
  6. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments," MPRA Paper 2761, University Library of Munich, Germany.
  7. 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.

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