Logo
Munich Personal RePEc Archive

Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract

Levy, Daniel and Young, Andrew (2020): Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract. Forthcoming in: Southern Economic Journal No. Forthcoming

[thumbnail of MPRA_paper_104294.pdf]
Preview
PDF
MPRA_paper_104294.pdf

Download (268kB) | Preview

Abstract

We study the cost of breaching an implicit contract in a goods market. Young and Levy (2014) document an implicit contract between the Coca-Cola Company and its consumers. This implicit contract included a promise of constant quality. We offer two types of evidence of the costs of breach. First, we document a case in 1930 when the Coca-Cola Company chose to avoid quality adjustment by incurring a permanently higher marginal cost of production, instead of a one-time increase in the fixed cost. Second, we explore the consequences of the company’s 1985 introduction of “New Coke” to replace the original beverage. Using the Hirschman’s (1970) model of Exit, Voice, and Loyalty, we argue that the public outcry that followed New Coke’s introduction was a response to the implicit contract breach.

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.