IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Explicit Evidence on an Implicit Contract

  • Andrew T. Young

    (University of Mississippi)

  • Daniel Levy

    ()

    (Bar-Ilan University)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.biu.ac.il/soc/ec/wp/4-05/4-05.html
File Function: Working paper
Download Restriction: no

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

as
in new window

Length:
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:biu:wpaper:2005-04
Contact details of provider: Postal:
Faculty of Social Sciences, Bar Ilan University 52900 Ramat-Gan

Phone: Phone: +972-3-5318345
Fax: +972-3-7384034
Web page: http://www.biu.ac.il/soc/ec
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. David Genesove, 1999. "The Nominal Rigidity of Apartment Rents," NBER Working Papers 7137, National Bureau of Economic Research, Inc.
  2. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
  3. Emi Nakamura & Dawit Zerom, 2010. "Accounting for Incomplete Pass-Through," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1192-1230.
  4. Julio J. Rotemberg, 2011. "Fair Pricing," Journal of the European Economic Association, European Economic Association, vol. 9(5), pages 952-981, October.
  5. Matthew J. Higgins & Daniel Levy & Andrew T. Young, 2005. "Growth and Convergence across the US: Evidence from County-Level Data," Working Papers 2005-06, Bar-Ilan University, Department of Economics.
  6. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  7. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric price adjustment in the small," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 728-737, May.
  8. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August.
  9. Kanbur, Ravi & Rapoport, Hillel, 2003. "Migration Selectivity And The Evolution Of Spatial Inequality," Working Papers 127769, Cornell University, Department of Applied Economics and Management.
  10. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "Sticky prices: why firms hesitate to adjust the price of their goods," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 13(Nov).
  11. Andrew T. Young & Matthew J. Higgins & Daniel Levy, 2003. "Sigma Convergence Versus Beta Convergence: Evidence from U.S. County-Level Data," Working Papers 2003-06, Bar-Ilan University, Department of Economics.
  12. Jonathan L. Willis, 2000. "Estimation of adjustment costs in a model of state-dependent pricing," Research Working Paper RWP 00-07, Federal Reserve Bank of Kansas City.
  13. Daniel Levy, 2006. "Price Rigidity and Flexibility: New Empirical Evidence," Emory Economics 0611, Department of Economics, Emory University (Atlanta).
  14. Daniel Levy & Frank Smets, 2010. "Price Setting and Price Adjustment in Some European Union Countries: Introduction to the Special Issue," Working Papers 2010-22, Bar-Ilan University, Department of Economics.
  15. Chen Zhen & Michael K. Wohlgenant & Shawn Karns & Phillip Kaufman, 2010. "Habit Formation and Demand for Sugar-Sweetened Beverages," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(1), pages 175-193.
  16. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
  17. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 1997. "The Magnitude of Menu Costs: Direct Evidence from Large U. S. Supermarket Chains," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 791-824.
  18. 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.
  19. Judith A. Chevalier & Anil K Kashyap, 2011. "Best Prices," NBER Working Papers 16680, National Bureau of Economic Research, Inc.
  20. Daniel Levy & Andrew T. Young, 2004. ""The Real Thing:" Nominal Price Rigidity of the Nickel Coke, 1886-1959," Working Papers 2004-2, Bar-Ilan University, Department of Economics.
  21. Luis Cabral, 2000. "Stretching Firm and Brand Reputation," Working Papers 00-07, New York University, Leonard N. Stern School of Business, Department of Economics.
  22. Dutta, Shantanu & Bergen, Mark & Levy, Daniel, 2002. "Price flexibility in channels of distribution: Evidence from scanner data," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1845-1900, September.
  23. Eric T. Anderson & Duncan I. Simester, 2010. "Price Stickiness and Customer Antagonism," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 729-765.
  24. Snir, Avichai & Levy, Daniel, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," MPRA Paper 29565, University Library of Munich, Germany.
  25. Ronen Bar-El & Teresa García-Muñoz & Shoshana Neuman & Yossef Tobol, 2013. "The evolution of secularization: cultural transmission, religion and fertility—theory, simulations and evidence," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(3), pages 1129-1174, July.
  26. Gita Gopinath & Oleg Itskhoki, 2010. "Frequency of Price Adjustment and Pass-Through," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 675-727.
  27. 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..
  28. Ball, Laurence & Romer, David, 2003. " Inflation and the Informativeness of Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 177-96, April.
  29. Peter J. Klenow & Benjamin A. Malin, 2010. "Microeconomic Evidence on Price-Setting," NBER Working Papers 15826, National Bureau of Economic Research, Inc.
  30. John Leahy, 2011. "A Survey of New Keynesian Theories of Aggregate Supply and Their Relation to Industrial Organization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 87-110, 08.
  31. Ernst Fehr & Simon Gaechter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," CESifo Working Paper Series 336, CESifo Group Munich.
  32. Durlauf, Steven N., 2001. "Manifesto for a growth econometrics," Journal of Econometrics, Elsevier, vol. 100(1), pages 65-69, January.
  33. Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Heterogeneity in Price Rigidity: Evidence from a Case Study Using Micro-Level Data," Macroeconomics 0402021, EconWPA.
  34. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  35. Ricard Gil & Justin Marion, 2013. "Self-Enforcing Agreements and Relational Contracting: Evidence from California Highway Procurement," Journal of Law, Economics and Organization, Oxford University Press, vol. 29(2), pages 239-277, April.
  36. Sourav Ray & Haipeng (Allan) Chen & Mark E. Bergen & Daniel Levy, 2006. "Asymmetric Wholesale Pricing: Theory and Evidence," Marketing Science, INFORMS, vol. 25(2), pages 131-154, 03-04.
  37. Alexander L. Wolman, 2000. "The frequency and costs of individual price adjustments," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-22.
  38. Emi Nakamura & Dawit Zerom, 2009. "Accounting for Incomplete Pass-Through," NBER Working Papers 15255, National Bureau of Economic Research, Inc.
  39. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
  40. Mark Bils, 1989. "Cyclical Pricing of Durable Goods," NBER Working Papers 3050, National Bureau of Economic Research, Inc.
  41. Leif Danziger, 2001. "Output and Welfare Effects of Inflation with Costly Price and Quantity Adjustments," American Economic Review, American Economic Association, vol. 91(5), pages 1608-1620, December.
  42. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
  43. Leonid V. Azarnert, 2008. "Involuntary Integration in Public Education, Fertility and Human Capital," Working Papers 2008-07, Bar-Ilan University, Department of Economics.
  44. Jean-Robert Tyran & Dirk Engelmann, 2002. "To Buy or Not to Buy? An Experimental Study of Consumer Boycotts in Retail Markets," University of St. Gallen Department of Economics working paper series 2002 2002-13, Department of Economics, University of St. Gallen.
  45. Lester G. Telser, 1964. "Advertising and Competition," Journal of Political Economy, University of Chicago Press, vol. 72, pages 537.
  46. Shantanu Dutta & Mark Bergen & Daniel Levy & Robert Venable, 2005. "Menu Costs, Posted Prices, and Multiproduct Retailers," Macroeconomics 0505007, EconWPA.
  47. Mark Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2003. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," Working Papers 2003-07, Bar-Ilan University, Department of Economics.
  48. Andersen, Torben M & Toulemonde, Eric, 2004. "Adapting Prices or Quantities in the Presence of Adjustment Costs?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 177-96, April.
  49. Cason Timothy N. & Friedman Daniel, 2002. "A Laboratory Study of Customer Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-45, February.
  50. Mark Bils, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 699-718.
  51. Anil K Kashyap, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 245-274.
  52. 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.).
  53. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  54. Renner, Elke & Tyran, Jean-Robert, 2004. "Price rigidity in customer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 55(4), pages 575-593, December.
  55. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1.
  56. Anil Kaul & Dick R. Wittink, 1995. "Empirical Generalizations About the Impact of Advertising on Price Sensitivity and Price," Marketing Science, INFORMS, vol. 14(3_supplem), pages G151-G160.
  57. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
  58. Jonathan L. Willis, 2003. "Implications of structural changes in the U.S. economy for pricing behavior and inflation dynamics," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-27.
  59. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
  60. 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.
  61. Eckard, E. Woodrow, 2007. "Retail price concentration, transaction costs, and price flexibility circa 1900," Explorations in Economic History, Elsevier, vol. 44(1), pages 131-153, January.
  62. 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.
  63. Margaret E. Slade & G.R.E.Q.A.M., 1998. "Optimal Pricing with Costly Adjustment: Evidence from Retail-Grocery Prices," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 87-107.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:biu:wpaper:2005-04. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.