The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959

Levy, Daniel and Young, Andrew (2004): The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959. Published in: Journal of Money, Credit and Banking , Vol. Volume, No. Issue No. 4 (August 2004): pp. 765-799.

Abstract

We report that the price of a 6.5oz Coke was 5¢ 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.

• Item Type: MPRA Paper
• Institution: Bar-Ilan University and University of Mississippi
• Language: English
• Keywords: Sticky Prices; Cost of Adjustment; Menu Cost; Retail Price Maintenance; Single-Coin Vending Machine; Customer Inconvenience Cost; Coca-Cola; Coke; Nickel Coke; Pepsi; Nickel and Dime Stores
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change ; Industrial Price Indices; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L10 - General; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; N - Economic History > N8 - Micro-Business History; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M31 - Marketing; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M10 - General; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Allen, Frederick (1994). Secret Formula: How Brilliant Marketing and Relentless Salesmanship Made Coca-Cola the Best-Known Product in the World, New York, NY: Harper Business. American Iron and Steel Institute (1945). Annual Statistical Report, New York, NY. Ball, Laurence, and David Romer (2003). “Inflation and the Informativeness of Prices.” Journal of Money, Credit and Banking 35, 177–196. Barsky, Robert, Mark Bergen, Shantanu Dutta, and Daniel Levy (2003). “What Can the Price Gap between Branded and Generic Products Tell Us about Markups?” In Scanner Data and Price Indexes, edited by Robert Feenstra and Matthew Shapiro, pp. 165–225. Chicago: National Bureau of Economic Research and the University of Chicago Press. Bergen, Mark, Haipeng Chen, and Daniel Levy (2003). “Making Sense of Ignoring Cents: Another Implication of Rational Inattention.” Manuscript, presented at the October 10–11, 2003 Central European University Workshop on “Microeconomic Pricing and the Macroeconomy,” Budapest. Bils, Mark and Peter Klenow (2002). “Some Evidence on the Importance of Sticky Prices.” National Bureau of Economic Research, Working Paper No. 9069. Blinder, Alan S., Elie R.D. Canetti, David E. Lebow, and Jeremy B. Rudd (1998). Asking About Prices: A New Approach to Understanding Price Stickiness. New York, NY: Russell Sage Foundation. Carlton, Dennis (1986). “The Rigidity of Prices.” American Economic Review 76, 637–658. Cecchetti, Steven G. (August 1986). “The Frequency of Price Adjustment: A Study of the Newsstand Prices of Magazine.” Journal of Econometrics 31, 255–274. Census of Manufacturers (1963). 1963 Census of Manufacturers, Volume II: Industry Statistics, Part 1: Major Groups 20–28. Washington, DC: U.S. Department of Commerce. Chen, Haipeng, Mark Bergen, and Daniel Levy (2002). “Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention.” Manuscript, presented at the January 2002 North American Meeting of the Econometric Society, Atlanta. Chevalier, Judith, Anil Kashyap, and Peter Rossi (2003). “Why Don’t Prices Rise During Peak Demand Periods? Evidence from Scanner Data.” American Economic Review 93, 15–37. Coca-Cola Company (1925). Reviewing ‘A Proud History:’ 1886 to 1925. Atlanta, GA. Coca-Cola Company (Various Years). The Coca-Cola Bottler, Atlanta, GA (May 1909a, June 1909b, March 1910, June 1918a, September, 1918b, January 1944a, April 1944b, July 1944c, April 1946, June 1947a, September 1947b, November 1947c, and April 1959). Coca-Cola Company (1983). Fact Sheet: Product Pricing Structure of Coca-Cola USA. Consumer Information Center, Atlanta, GA. Coca-Cola Company (1993). Always Coca-Cola: A Quick Reference Chronology from 1886 to 1993. Coca-Cola Company (Undated). Did You Know? Atlanta, Public Relations Department. Coca-Cola Company (Undated). Fact Sheets Concerning the Nickel Price. Atlanta, Public Relations Department. Croushore, Dean, and Tom Stark (2002). “Forecasting Coin Demand.” Federal Reserve Bank of Philadelphia, Working Paper No. 02-15. Davis, Michael, and James Hamilton (2004). “Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices.” Journal of Money, Credit and Banking 36, 17–37. Dutta, Shantanu, Mark Bergen, Daniel Levy, and Robert Venable (1999). “Menu Costs, Posted Prices, and Multi-Product Retailers.” Journal of Money, Credit, and Banking 31, 683–703. Dutta, Shantanu, Mark Bergen, and Daniel Levy (2002). “Price Flexibility in Channels of Distribution: Evidence from Scanner Data.” Journal of Economic Dynamics and Control 26, 1845–1900. Eden, Benjamin (2001). “Inflation and Price Adjustment: An Analysis of Micro Data.” Review of Economic Dynamics 4, 607–636. Fortune Magazine (1951). “The Nickel Drink is Groggy.” January, 78–79, continued on 129– 133. Friedman, Milton and Rose (1990). Free to Choose: A Personal Statement. New York: Harcourt Brace. Genesove, David (2003). “The Nominal Rigidity of Apartment Rents.” Review of Economics and Statistics 85, 844–853. Genesove, David and Wallace P. Mullin (1997). “Predation and Its Rate of Return: The Sugar Industry, 1887–1914.” National Bureau of Economic Research, Working Paper No. 6032. Gordon, Robert J. (2000). Macroeconomics. 8th Edition. Reading, MA: Addison-Wesley. Jeuland, Abel P. and Steven M. Shugan (1983). “Managing Channel Profits.” Marketing Science 2, 239–272. Kackmeister, Alan K. (2002). “Has Retail Price Behavior Changed Since 1889? Evidence from Microdata.” Ph.D. Dissertation, University of California, Berkeley. Kahn, E.J. Jr. (1969). Robert Winship Woodruff. Atlanta, GA: The Coca-Cola Company. Kashyap, Anil K. (1995). “Sticky Prices: New Evidence from Retail Catalogues.” Quarterly Journal of Economics 110, 245–274. Katz, Eliakim, and Jacob Paroush (1984). “Royalty Vs. Partnership Agreement in the Creative Arts.” Atlantic Economic Journal 12, 41–46. Konieczny, Jerzy D., and Andrzej Skrzypacz (2003). “A New Test of the Menu Cost Model.” Manuscript, presented at the October 10–11, 2003 Central European University Workshop on “Microeconomic Pricing and the Macro-economy,” Budapest. Levy, Daniel, Mark Bergen, Shantanu Dutta, and Robert Venable (1997). “The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains.” Quarterly Journal of Economics 112, 791–825. Levy, Daniel, Shantanu Dutta, and Mark Bergen (2002). “Heterogeneity in Price Rigidity: Evidence from a Case Study Using Micro-Level Data.” Journal of Money, Credit, and Banking 34, 197–220. Levy, Daniel and Andrew Young (2002). “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959.” Manuscript, Bar-Ilan University and Emory University. Mankiw, N. Gregory (1985). “Small Menu Costs and Large Business Cycles: a Macroeconomic Model of Monopoly.” Quarterly Journal of Economics 100, 529–539. Marshall, Martin B. (1954). Automatic Merchandising. Cambridge, MA: Riverside. Müller Georg, Daniel Levy, Shantanu Dutta, and Mark Bergen (2001). “Holiday Price Rigidity and Cost of Price Adjustment.” Presented at the American Economics Association Meeting and the NBER-CRIW Conference, Working Paper No. 3-2002, Bar-Ilan University. Munsey, Cecil (1972). The Illustrated Guide to the Collectibles of Coca-Cola. New York, NY: Hawthorn Books, Inc. Publishers. Oi, Walter Y. (2001). “Retail Trade in a Dynamic Economy.” Manuscript, University of Rochester. Okun, Arthur M. (1981). Prices and Quantities: A Macroeconomic Analysis. Washington, DC: The Brookings Institution. Pendergrast, Mark. (1993). For God, Country and Coca-Cola: The Unauthorized History of the Great American Soft Drink and the Company that Makes It. New York, NY: Simon and Schuster. Pitrone, Jean Maddern (2003). F.W. Woolworth and the American Five and Dime: A Social History. New York, NY: McFarland and Company,. Riley, John J. (1946). Organization in the Soft Drink Industry: A History of the American Bottlers of Carbonated Beverages. Washington, DC: American Bottlers of Carbonated Beverages. Rotemberg, Julio J. (1982). “Sticky Prices in the United States.” Journal of Political Economy 90, 1187–1211. Rotemberg, Julio J. (2002). “Customer Anger at Price Increases, Time Variation in the Frequency of Price changes and Monetary Policy.” National Bureau of Economic Research, Working Paper No. 9320. Rotemberg, Julio J. (2003), “The Benevolence of the Baker: Fair Pricing under Threat of Customer Anger.” Manuscript, presented at the October 10–11, 2003 Central European University Workshop on “Microeconomic Pricing and the Macro-economy,” Budapest. Schaeffer, Randy S. and William E. Bateman (1985). “The Formula for Coca-Cola: The Old... The New.” The Cola Call, 4–6, Coca-Cola Company Archives. Schreiber, G.R. (1954). Automatic Selling. New York, NY: John Wiley & Sons. Schreiber, G.R. (1961). A Concise History of Vending in the U.S.A. Chicago, IL: Vend. Shugan, Steven M. (1985). “Implicit Understanding in Channels of Distribution.” Management Science 31, 435–460. Slade, Margaret E. (1998). “Optimal Pricing with Costly Adjustment: Evidence from Retail- Grocery Prices.” Review of Economic Studies 65, 87–107. Stigler, George J. and James K. Kindahl (1970). Behavior of Industrial Prices. New York, NY: University of Chicago and National Bureau of Economic Research. Tedlow, Richard S. (1990). “The Great Cola Wars: Coke vs. Pepsi.” In New and Improved: The Story of Mass Marketing in America, pp. 22–111. New York, NY: Basic Book Publishers. U.S. Census Bureau (1961). Historical Statistics of the United States: Colonial Times to 1957. Washington, DC. Warner, Elizabeth and Robert Barsky (1995). “The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays.” Quarterly Journal of Economics 110, 321–52. Willis, Jonathan L. (1999). “Estimation of Adjustment Costs in a Model of State-Dependent Pricing.” Ph.D. Dissertation: Boston University. Willis, Jonathan L. (2003). “General Equilibrium of a Monetary Model with State Dependent Pricing.” Manuscript, presented at the October 10–11, 2003 Central European University Workshop on “Microeconomic Pricing and the Macro-economy,” Budapest. Young, James H. (1983). “Three Southern Food and Drug Cases.” Journal of Southern History 49, 3–36. Zbaracki, Mark, Mark Ritson, Daniel Levy, Shantanu Dutta, and Mark Bergen (2004). “The Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets.” Review of Economics and Statistics, forthcoming.