On November 9, Daniel Levy, a professor of economics at Bar Ilan University, Emory University and a member of ISET’s International Faculty Committee, presented his paper ‘The real thing’: nominal price rigidity of the nickel Coke, 1886-1959“ (co-authored by his colleague Andrew Young) to ISET professors, students, and researchers.
Prof. Levy’s interesting topic and entertaining presentation kept the audience of the conference hall totally engaged throughout the seminar.
We have all noticed that prices usually change; that's fundamental to how economies work. And yet in 1886, a bottle of Coke cost a nickel. It was also a nickel in 1900, 1915, and 1930. In fact, 70 years after the first Coke was sold, you could still buy a bottle for a nickel. Three wars, the Great Depression, hundreds of competitors — none of it made any difference for the price of Coke. Why not?
In 1899, two lawyers paid a visit to the president of Coca-Cola. At the time, Coke was sold at soda fountains. But the lawyers were interested in this new idea: selling drinks in bottles. The lawyers wanted to buy the bottling rights for Coca-Cola.
The president of Coca-Cola didn't think much of the whole bottle thing. So he made a deal with the lawyers: He'd let them sell Coke in bottles, and he'd sell them the syrup to do it. According to the terms of the deal, the lawyers would be able to buy the syrup at a fixed price. Forever.
Bottled drinks, of course, took off. And Coca-Cola was in a bind. If the bottlers or a corner store decided to raise the price of a bottle of Coke, Coca-Cola wouldn't get any extra money. So, if you're Coca-Cola, you want to somehow keep the price down at 5 cents so you can sell as much syrup as possible to the bottlers. What do you do?
The company couldn't actually put price tags on the bottles of Coke saying "5 cents." But it could paint a giant ad on the side of a building right next to the store that says, "Drink Coca-Cola, 5 Cents."
That contract with the bottlers eventually got renegotiated. But the price of Coke stayed at a nickel. That was partly due to another obstacle: the vending machine. The Coca-Cola vending machines were built to take a single coin: a nickel.
Prof. Levy says the folks at Coca-Cola thought about converting the vending machines to take a dime. But doubling the price was too much. They wanted something in between. So they asked the U.S. Treasury to issue a 7.5-cent coin. At one point, the head of Coca-Cola asked President Eisenhower for help (they were hunting buddies.) No luck.
In the end, inflation killed the nickel Coke. The price of the ingredients rose. In the late 1940s, some stores sold Cokes for 6 cents. The last nickel Coke seems to have been in 1959. The nickel price had lasted over 70 years and it wasn't a bad thing for the company. It is one reason Coke is everywhere today. (Source: Why Coke Cost a Nickel for 70 Years in NPR by David Kestenbaum).
ISET would like to thank Prof. Levy for providing a perfect example of how economic concepts can be presented in an entertaining, simple, and interesting manner.
For detailed information about the paper, please click here.