Explicit Evidence of an Implicit Contract

Andrew Young () and Daniel Levy ()

No 2013-06, Working Papers from Bar-Ilan University, Department of Economics

Abstract: We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. Since implicit contracts are unobservable, we adopt a narrative approach to demonstrate that the Coca-Cola Company left a written evidence of the implicit contract with its customers—a very explicit form of an implicit contract. The implicit contract promised a 6.5oz Coca-Cola of a constant quality, the “secret formula,” at a constant price, 5¢. We show that Coca-Cola attributes and market structure made it a suitable candidate for an implicit contract. Focusing on the observable implications of such an implicit contract, we offer evidence of the Company both acknowledging and acting on this implicit contract, which was valued by consumers. During a period of 74 years, we find evidence of only a single case of true quality change. We demonstrate that the company perceived itself as vulnerable to consumer backlash by reneging on the pledge, and conclude 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 (search for similar items in EconPapers)
JEL-codes: A14 E12 E31 K00 K12 K22 K23 L14 L16 L66 M21 M31 N80 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-10
New Economics Papers: this item is included in nep-mac
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