Bar-Ilan University Economics Working Paper No. 2004
47 Pages Posted: 6 Feb 2004
Date Written: February 4, 2004
We report that the price of a 6.5 ounce Coke was 5 cents from 1886 until 1959. Thus, we are documenting a nominal price rigidity that lasted more than 70 years! The case of Coca-Cola is particularly interesting because during the 70-year period there were substantial changes in the soft drink industry as well as two World Wars, the Great Depression, and numerous regulatory interventions and lawsuits, which led to substantial changes in the Coca-Cola market conditions. The nickel price of Coke, nevertheless, remained unchanged. We find that this unusual rigidity is best explained by (1) a contract between the Company and its parent bottlers that encouraged retail price maintenance, (2) a single-coin vending machine technology, which limited the Company's price adjustment options due to limited availability and unreliability of the existing flexible price adjustment technologies, and (3) a single-coin monetary transaction technology, which limited the Company's price adjustment options due to the customer inconvenience cost. We show that these price adjustment costs are of a different nature than the standard menu cost, and their estimates exceed the existing estimates by an order of magnitude. A possible broader relevance of the nickel Coke phenomenon is discussed in the context of Nickel and Dime Stores, which were popular in the US in the late 1800s and the early 1900s.
Keywords: Price rigidity, sticky prices, cost of adjustment, cost of price adjustment, retail price maintenance, Coca-Cola, Coke, the Real Thing, Pepsi, Nickel Coke, monetary transacation technology constraint, indivisibility constraint, inconvenience cost, Nickel and Dime Stores
JEL Classification: E12,E31,L16,L10,L11,D40,M10,M31,N1,N8
Suggested Citation: Suggested Citation
Levy, Daniel and Young, Andrew, 'The Real Thing': Nominal Price Rigidity of the Nickel Coke, 1886-1959 (February 4, 2004). Bar-Ilan University Economics Working Paper Series. Available at SSRN: https://ssrn.com/abstract=389665 or http://dx.doi.org/10.2139/ssrn.389665