Explicit Evidence of an Implicit Contract

Journal of Law, Economics, & Organization, Forthcoming

44 Pages Posted: 20 Aug 2013

See all articles by Andrew T. Young

Andrew T. Young

Texas Tech University - Rawls College of Business

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; Rimini Center for Economic Analysis

Date Written: August 19, 2013

Abstract

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 a written evidence of its implicit contract with its consumers — a very explicit form of an implicit contract. The contract promised a 5¢ 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 Analyzing a large number of historical documents, we offer evidence of the Company both acknowledging and acting on this implicit contract.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.

Keywords: Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long-Term Relationship, Price Rigidity, Sticky Prices, Price Adjustment, Quality Rigidity, Quality Adjustment, Nickel Coke, Coca-Cola, Secret Formula, Real Thing

JEL Classification: E12, E31, K00, K12, K22, K23, L14, L16, L66, M21, M31, N80, A14

Suggested Citation

Young, Andrew T. and Levy, Daniel, Explicit Evidence of an Implicit Contract (August 19, 2013). Journal of Law, Economics, & Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2312741

Andrew T. Young

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)

HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

1602 Fishburne Drive, Suite 306
Rich Building
Atlanta, GA 30322-0001
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/Levydaniel.html

Rimini Center for Economic Analysis ( email )

Wilfrid Laurier University
75 University Ave W.
Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://rcea.org/

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