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Explicit Evidence of an Implicit Contract

  • Andrew T. Young
  • Daniel Levy

We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left written evidence of its implicit contract with its consumers - a very explicit form of an implicit contract. The contract promised a 5 cent price and adherence to the "Secret Formula." Because implicit contracts are unobservable, we adopt a narrative approach. Analyzing a large number of historical documents, we offer evidence of the Company both acknowledging and acting on this implicit contract. We explore quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant price but also a constant quality (the "real thing"). During a period of over 70 years, we find evidence of only a single case of true quality change. We demonstrate that the perceived costs of breaking the implicit contract were large.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1309.

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Date of creation: Aug 2013
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Handle: RePEc:emo:wp2003:1309
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