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Explicit Evidence of an Implicit Contract

Author

Listed:
  • Andrew T Young

    (TTU - Texas Tech University [Lubbock])

  • Daniel Levy

    (RCEA - Rimini Center for Economic Analysis, Emory University [Atlanta, GA], Bar-Ilan University [Israël])

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.

Suggested Citation

  • Andrew T Young & Daniel Levy, 2014. "Explicit Evidence of an Implicit Contract," Post-Print hal-02387739, HAL.
    • Handle: RePEc:hal:journl:hal-02387739
    DOI: 10.1093/jleo/ewt013
    Note: View the original document on HAL open archive server: https://hal.science/hal-02387739
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    Cited by:

    1. Snir, Avichai & Chen, Haipeng (Allan) & Levy, Daniel, 2022. "Zero-Ending Prices, Cognitive Convenience, and Price Rigidity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 203, pages 519-542.
    2. Daniel Levy & Avichai Snir, 2022. "Potterian economics," Oxford Open Economics, Oxford University Press, vol. 1, pages 1-32.
    3. Levy, Daniel, 2007. "Price Rigidity and Flexibility: New Empirical Evidence - Introduction to the Special Issue," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(7 (Specia), pages 639-647.
    4. Daniel Levy & Andrew T. Young, 2021. "Promise, trust, and betrayal: Costs of breaching an implicit contract," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 1031-1051, January.
    5. Andrew T. Young & Alexander K. Blue, 2007. "Retail prices during a change in monetary regimes: evidence from Sears, Roebuck catalogs, 1938-1951," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 763-775.
    6. Snir, Avichai & Levy, Daniel, 2021. "If You Think 9-Ending Prices Are Low, Think Again," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 6(1 (Forthc).
    7. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647.
    8. Müller, Georg & Bergen, Mark & Dutta, Shantanu & Levy, Daniel, 2007. "Holiday Non-Price Rigidity and Cost of Adjustment," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(7 (Specia), pages 817-832.
    9. Maarten Dossche, 2009. "Understanding Inflation Dynamics.Where Do We Stand?," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(2), pages 209-227.
    10. Daniel Levy, 2007. "Price rigidity and flexibility: recent theoretical developments," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 523-530.
    11. Georg Müller & Mark Bergen & Shantanu Dutta & Daniel Levy, 2007. "Non-price rigidity and cost of adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 817-832.
    12. Levy, Daniel, 2007. "Price Rigidity and Flexibility: Recent Theoretical Developments - Introduction to the Special Issue," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(6 (Specia), pages 523-530.
    13. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    14. Söderberg, Johan, 2011. "Customer markets and the welfare effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 206-219.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General
    • N80 - Economic History - - Micro-Business History - - - General, International, or Comparative
    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics

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