Explicit Evidence of an Implicit Contract

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 Analyzing a large number of historical documents, we offer evidence of the Company both acknowledging and acting on this implicit contract.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