Explicit Evidence on an Implicit Contract

Young, Andrew and Levy, Daniel (2006): Explicit Evidence on an Implicit Contract.

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. In general, observing implicit contracts directly is difficult because of their implicit nature. To overcome the 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 Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company not only saying that it had an important implicit contract with its consumers, but also acting on it. This study makes an additional and unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. We present evidence that the implicit contract included a promise not only of a constant nominal price but also a constant quality. We document the dedication to a 6.5oz serving of the "Secret Formula." Indeed, 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. In addition, we are able to offer one piece of direct evidence on the magnitude of these costs by studying the events surrounding the failed introduction of the New Coke in 1985.

• Item Type: MPRA Paper
• Institution: Bar-Ilan University
• Language: English
• Keywords: E12; E31; L14; L16; L66; M30; N80; A14
• 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 > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

REFERENCES Publications

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Court Cases

The Coca-Cola Bottling Company v. The Coca-Cola Company. Fulton County Superior Court, Georgia, 1920. The Coca-Cola Bottling Company v. The Coca-Cola Company. US District Court, Delaware, 1920. The Coca-Cola Company v. The Koke Company of America. 254 US 143, 41 Supreme Court 113, 1920. Rucker, Henry A. v. The Coca-Cola Company. US Circuit Court, District of Georgia. (Trial and Appeal Record, Federal Record Center, East Point, Georgia.) United States v. Forty Barrels and Twenty Kegs of Coca-Cola, 241 US 265, 289. (Record of Appeal from the Federal Records Center, East Point, Georgia.)

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