For better or worth

12th May, 2007

The price of the first serving of Coca-Cola was five cents in 1886, which is about a dollar (50p) in today’s money. Coke no longer sells for a nickel, and that is not terribly surprising. What is surprising is that it took more than 60 years for the price of Coca-Cola to change.

Economists call this nominal price rigidity. My salary is not tweaked each month to reflect the latest inflation figures, and neither is yours. Restaurants do not reprint their menus, nor wholesale companies their catalogues, if the cost of their inputs changes by a penny.

That might be a problem. Prices keep the economy running smoothly by adjusting to reflect demand and the underlying costs of production. If prices don’t adjust smoothly for any reason then the economic consequences could be serious. If wages can’t fall in a recession then people will lose their jobs instead. If prices can’t fall when demand does, sales will collapse with much the same effect.

Coke was clearly an exceptional example of rigid prices. Daniel Levy and Andrew Young, the economists who analysed the case, report that Coke’s price stayed at five cents a serving while the price of other products bounced all over the place. The price of sugar tripled after the first world war before falling back somewhat; over the six decades, the price of coffee went up eightfold. Coke itself was taxed first as a medicine, then as a soft drink, and survived sugar rationing. All the while the price stayed at a nickel.

Part of Coke’s problem was the cost of replacing vending machines that accepted only nickels…

Continued at, subscription free.

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