RS 9: Why The Price Of Coke Didn't Change For 70 Years

RS 9: Why The Price Of Coke Didn't Change For 70 Years

Coca Cola 1953 Advertisement

            Everyone knows the infamous soda drink company Coca Cola.  Coca Cola has been around since 1886, and within that time they managed to keep hold of a secret recipe that makes their soda different from all other competitors.  Although that seems pretty interesting, the most interesting thing about this company is that they did not change the price of coke for 70 years.  This is rare because in a normal economy prices are supposed to fluctuate depending one what is available, how many people want it, and how much it costs to produce the product.  The fact that Coke got away with selling its soda for the same price of five cents for 70 years is economically very interesting.

            From 1886 to 1959, Coca Cola was able to sell its product for only one nickel.  Today that sounds outrageous because an average 20 ounce bottle of Coke costs on average $1.50.  So how did this nickel trend start, and how did it manage to last for seventy years?  That question was answered by Daniel Levy, an Economics professor at Emory University, after he toured the World of Coca Cola Museum.  When he was there he found it interesting that during times of economic depression, war, prohibition, and many laws being enacted that Coca Cola was able to maintain its cost at a nickel.  So he went to the Coca Cola archives where he got all of his answers.

            The five-cent Coca Cola started as an attempt to attract customers.  The nickel Coke was a competitive advantage for Coca Cola because at that time most fountain drink soda companies were selling for seven or eight cents.  By marketing itself as an affordable soda, Coca Cola was set for success.  In 1898, two lawyers from Tennessee were trying to buy bottling rights from Coca Cola.  In this contract, Coca Cola had to charge the bottlers a fixed rate for the rights to bottle Coke.  This meant that even though the prices of ingredients could increase, Coca Cola could not charge the bottlers any more for the syrup.  Technically this was not a good move on Coca Cola’s part because they could possibly lose money with deal.

            In an attempt to cover up their contract mistake, Coca Cola decided to use advertising to its advantage.  By constantly advertising Coke as five cents, Coca Cola prevented the bottlers from raising coke to any other price.  This also allowed for Coca Cola to establish brand loyalty with consumers.  This allowed for current consumers to continue purchasing the soda, as well as attracting new consumers.   Even though prices for ingredients were increasing, the advertising campaign was so successful that the higher costs of ingredients did not matter.  Coke was still selling at five cents, and Coca Cola still managed to make profits.

            The next thing that continued to trap Coca Cola in their five-cent price was the invention of the vending machine.  Vending machines were great because they made Coke more readily available for consumers.  The only problem with the machines was that they could not create change; therefore the price of Coke had to remain at five cents.  In an attempt to create more of a profit and raise prices without having to change the 400,000 Coca Cola vending machines, Coca Cola asked President Eisenhower to create a seven and a half cent coin. Clearly that idea was never successful.  However, what Coca Cola did end up doing was make every ninth bottle in the vending machine empty, so that person would have to put in another nickel in order get a full bottle of soda.  On average, a person would pay more than a nickel for a bottle of soda.

            During the 1940s inflation was inevitable because the US decided to go off of the gold standard.  As the amount of money continued to rise, prices had to increase.  This meant that Coca Cola would not be able to keep the five-cent Coke for much longer.  By 1947, Coke began to go on sale for six or seven cents.  By 1959 there were no more nickel Cokes. 

            Prices vary, and it is normal that they do so.  When prices become constant for so long, we get stuck within them.  Coca Cola could have increased their prices many times however they didn’t because it was their promise to their customers.  Prices are a psychological promise.  When a customer sees a product sell for one price and then a couple of months later the price is higher, they think that they are guaranteed to the lower price.  Companies will choose to shrink a price before they raise their prices because of this psychological promise.  Today, the nickel coke is still around, just in bigger bottles.

RS8:Manufacturing The Song Of The Summer

Manufacturing The Song Of The Summer

Rihanna's "Man Down"

            Some people may think when they are purchasing a song on iTunes that they are paying a lot for something that they just listen to.  I understand that $1.29 adds up per song; but out of the total cost it takes to produce and make a song, we are only paying a small fraction of it.  There are many economic factors that contribute to making a top song, all of which were discussed in this podcast.

            Planet Money takes Rihanna’s song “Man Down” to explain all of the costs that go into producing the most popular song of the summer.  Hit summer songs are important to people because it reminds people of the good memories from that summer.  I know that I categorize my summers by songs that were my favorite at that time and where I was when I listened to them the most.  For example, in the summer of 2009 my favorite song was “I Got a Feeling” by the Black Eyed Peas.  During that summer I was playing softball in Florida for a nationals tournament.  Every time I here this song now I constantly think of that summer.  That is why I was surprised Planet Money used “Man Down” as the song of the summer for 2011.  It is definitely not the song that reminds me of Summer 2011.  Regardless that is the song they chose to represent the hit song. 

            Creating an album starts in little sweat shops known as hit factories where writers spend two weeks trying to create lyrics to melodies that are handed to them.  At the end of the two weeks, the singer, in this case Rihanna, will come in and pick the lyrics that she likes best.  This part along cost approximately $25000 per day, which includes the cost of the writing space, room and board, salaries for the writers, and other expenses.  This alone totals to $18000 per song.  After that, the songwriter is paid around $15000, the song producer is paid around $20000, and the voice producer is paid around $10000.  At this point the total cost per song is $53000, and that is even before Rihanna’s voice is recorded on the song.

            After RI RI’s voice is recorded, the next thing record labels have to do is get the song out to the public.  This is done with marketing to radio stations and getting the singer our there to promote their own album.  Approximately $1.8 million dollars goes into marketing and promoting one song.  That does not include any extra money that record labels slip into the pockets of radio DJ's.  It has been said that in the past record labels have tried to slip radio station bribes so that there song can be played more than other songs.  Although this has been deemed illegal, it is still being done in other, not as obvious ways. 

            All together, it cost Rihanna’s record label $1,078,000 to create “Man Down”.  Once they created the music video to go along with the song, it raised the cost to $1,250,000.  A lot of money goes into producing a “hit” song.  Most of the time record labels take a chance by spending that much money to produce the song, and never end up making a profit off of it.  In this case the record label did not make as much as they hoped they would with “Man Down” because the song did not last as long in the number one spot as they thought.  The profit that these labels make is also diminishing because people do not have to purchase a whole album to listen to the one song they actually like.  With inventions like iTunes, people can pick and choose which songs they want to purchase.  Not to mention people can also illegally download music online, which also lowers profits for record labels.  Music is more than just listening to music and the singer making money.  Economics plays a big role in the production of music, a bigger role than most people would think.

RS 7: The Economics of the Music Industry

RS 7: The Economics of the Music Industry

            Music is an industry that many of us take for granted.  We go to YouTube click on a song and listen to it for free, and then most likely download it illegally, also for free.  As a society we are endangering the music industry.  It takes a lot of money to come up with one album.  Whether it is promotion, painting, or radio costs, it costs millions of dollars for radio producers to put out one song.  With the Internet being so readily accessible, the process of buying CDs or buying songs off of iTunes has diminished, ruining the record industry. 

            Music is a global industry, everyone all around the world listens to music.  Just like cars, toothpaste, or pieces of art, music is a manufactured product.  Today, America leads the world in producing pop music.  However, the Korean’s are rapidly approaching becoming just as successful as the Americans.  It took American culture 100 years to fully develop the product of pop music, and in that time it only took the Koreans 20 years.  The theory behind this is that the Koreans are picking up on what the Americans do and making it better by seeing what they did wrong.  The Koreans learned three big factors from the American culture of music.  The first is that music can be manufactured.  The first American pop song was “Oh Suzanna” by Stephen Foster, which was released in 1847, 150 years ago.  The first Korean pop song came out in 1992, only 20 years ago.  The second lesson leaned was that music can be distributed.  The jukebox era is what saved American music.  People paid to listen to the songs that they wanted to hear, and there was no limit as to how many times they could listen to it.  This was a way to keep track of what was in demand and most listened too.  The Koreans learned distribution through image.  When releasing a song, Koreans would hear the new song on television rather than a radio. The final lesson was that music had to be packaged and sold to the consumers.  Americans did this by using compact discs, better known as CDs.  CDs were small and light weight, and could be sent anywhere around the world.  This also provided for the global industry to expand.  The Koreans picked up on this by producing videos to go along with the music.  When a song came out, you would watch the corresponding music video.  This too also helped expand the market because anyone in the world could watch these videos being that they were provided on the Internet. 

Jukebox Era

            Music is more than just something that we listen too.  It is a product.  Lots of costs go into making a song, putting an album on a CD, packaging the CD, marketing the music, and getting it out to radios.  Selling music takes intelligence, especially in times where it is so easy just to download the music at no cost off.  When iTunes was first created, it cost only 99 cents to purchase a song.  Today the prices can range from 99 cents to $1.29.  Even the prices of CDs have slightly increased.  This could be a result of the diminishing music industry because people purchase music illegally.  I do not think that people understand how much money goes into producing music.  I know I didn’t until I listened to the Katy Perry podcast.  This is definitely going to make me think twice before I download some music for free, but at the price of $1.29 per song I do not think I would be willing to pay that much for music.  I think that something needs to be done in order to change the way music is sold to people so it would benefit the buyer just as much as it would benefit the company selling the product.

R6 Planet Money Podcast: An Economist Gets Stoned

R6 Planet Money Podcast: An Economist Gets Stoned

            This podcast presented information that would appeal to several college students or those who like to “fly high”.  The podcast was about legalizing marijuana and whether or not it would actually boost the economy.  By legalizing marijuana, it is said that the prices will go down incredibly.  They mentioned that if it were originally a thousand dollars per ounce it could go all the way down to a dollar per ounce.  A doctor from Harvard University compares the price of marijuana to the prices of other legalized products.  As an example he compares it to a chocolate bar.  He says the supplies that go into a chocolate bar are not expensive but the other expenses such as taxes, transportation, insurance, packaging, advertising, and other expenses all drive up the costs of the chocolate bar.  The same goes for the marijuana.  People have raised the price of the marijuana because of all of the costs it takes to smuggle it into the country.  He says that if it were legal those prices would not exist and therefore they would be lowered. 

            Another thing mentioned in this podcast was how legalizing marijuana would boost the suffering economy.  They mentioned the Alcohol Probation that occurred in the United Stated from 1920 to the early 1930s.  While it was banned, people went to speakeasy bars to illegally purchase and consume alcohol.  Even though money was still being made, there was no tax on the alcohol so the government was making no money on it.  However once they ended the probation, the government placed a tax on alcohol and ended up making money off of it.  Although the process would be similar by legalizing marijuana, I think there would be some differences.  The podcast even said that the main time people smoke marijuana is in their teenage years when they are experimenting with risky behavior.  Therefore the main consumers would be teenagers who purchase it, except for the few outliers.  Although these consumers may purchase more marijuana, the lower prices will not affect the people who have no interest in getting high.  Whereas for alcohol, once you are twenty-one you can legally purchase alcohol from any age on.  The age group of alcohol consumers is much larger than that of marijuana consumers.  Although I do think that legalizing marijuana would have some impact on the US economy, I do not think it is as large as some people would expect it to be.

            Legalizing marijuana is a very debatable topic.  Many people against it say that it will lower the price and increase the amount of people that smoke it.  Those for it would say that it will lower the price, more people will use it, and it will help the economy.  Although it has been seen in the past how legalizing an illegal substance has benefited the economy through the Alcohol Probation in the 1920s, I feel the effects on legalizing marijuana would not be the same.  By lowering prices, more people will purchase marijuana, however it may not attract more people to start using marijuana.  The only way that legalizing marijuana would benefit the economy to the level that we need it too would be by attracting new users to purchase the marijuana at the lower prices with the taxes.  In my opinion the best thing to do would be to leave marijuana only legal for medical purposes and find a different way to boost our economy.

Because I Got High