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.
| Original language | English |
|---|---|
| Pages (from-to) | 804-832 |
| Number of pages | 29 |
| Journal | Journal of Law, Economics, and Organization |
| Volume | 30 |
| Issue number | 4 |
| Early online date | 22 Oct 2013 |
| DOIs | |
| State | Published - 1 Nov 2014 |
Bibliographical note
Publisher Copyright:© The Author 2013.
Funding
Daniel Levy acknowledges financial support from the University Research Committee at Emory University and from Adar Foundation at the Department of Economics at Bar-Ilan University, and research assistance of Eleana Aguilar, Xia Liu, and the late Yihong Xia. Some parts of the manuscript were written at the Monetary Policy Research Division of the European Central Bank in Frankfurt, where Daniel Levy was a visiting scholar. He gratefully acknowledges the Bank’s hospitality and research support. All errors are ours.
| Funders | Funder number |
|---|---|
| Department of Economics at Bar-Ilan University |