Explicit Evidence of an Implicit Contract

JEL codes: 
B12
Author/s: 
Version Date: 
Aug 2013
Abstract: 

We offer the first direct evidence of an implicit contract in a goods market. The evidence comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. The contract promised a 5¢ price and adherence to the “Secret Formula.” Because implicit contracts are unobservable, we adopt a narrative approach. Analyzing a large number of historical documents, we offer evidence of the Company both acknowledging and acting on this implicit contract. We explore quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant price but also a constant quality (the “real thing”). During a period of over 70 years, we find evidence of only a single case of true quality change. We demonstrate that the perceived costs of breaking the implicit contract were large.

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