levy_05

Emory University
Department of Economics
Working Papers

Title:

Explicit Evidence on an Implicit Contract

Number: 05-19

Author:
Andrew T. Young and Daniel Levy

Issue Date: June 2005 (Revised, November 2006)

Abstract: We offer the first direct evidence of an implicit contract in a well-known product market—the market for Coca-Cola. 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 impossible because of their implicit nature. In the case of Coca-Cola, however, we are able to document the 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 the 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 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.

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Title:	Explicit Evidence on an Implicit Contract
Number:	05-19
Author:	Andrew T. Young and Daniel Levy
Issue Date:	June 2005 (Revised, November 2006)
Abstract:	We offer the first direct evidence of an implicit contract in a well-known product market—the market for Coca-Cola. 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 impossible because of their implicit nature. In the case of Coca-Cola, however, we are able to document the 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 the 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 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.