Explicit Evidence on an Implicit Contract

43 Pages Posted: 9 Jun 2005 Last revised: 4 Jun 2012

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: June 21, 2010

Abstract

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. The contract represented the promise of a five cent (nominal) price and adherence to the “Secret Formula”. In general, the implicit nature of such contracts makes observation difficult. To overcome this difficulty, we adopt a narrative approach. Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company both acknowledging and acting on this implicit contract. We also make another unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant nominal price but also a constant quality (i.e., 6.5 oz. of the Secret Formula). 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. We argue that one piece of direct evidence on the magnitude of these costs is the aftermath “New Coke’s” introduction in 1985.

Keywords: Implicit Contract, Explicit Contract, Invisible Handshake, Customer Market, Long-Term Relationship, Price Rigidity, Coca-Cola, Nickel Coke

JEL Classification: E12, E31, L14, L16, L66, M30, N80, A14

Suggested Citation

Young, Andrew T. and Levy, Daniel, Explicit Evidence on an Implicit Contract (June 21, 2010). Emory Law and Economics Research Paper No. 4-05, Bar Ilan Univ. Pub Law Working Paper No. 8-05, Available at SSRN: https://ssrn.com/abstract=739984 or http://dx.doi.org/10.2139/ssrn.739984

Andrew T. Young (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

Daniel Levy

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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