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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Invisible Handshake; Implicit Contract; Customer Market; Long-Term Relationship; Cost of Breaching a Contract; Cost of Breaking a Contract; Coca-Cola; New Coke; Exit Voice and Loyalty; Nickel Coke; Sticky Prices; Rigid Prices; Price Stickiness; Price Rigidity; Cost of Price Adjustment; Menu Cost; Cost of Quality Adjustment
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; K - Law and Economics > K1 - Basic Areas of Law > K10 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change ; Industrial Price Indices; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L66 - Food ; Beverages ; Cosmetics ; Tobacco ; Wine and Spirits; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics > M20 - General; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M3 - Marketing and Advertising > M30 - General; N - Economic History > N8 - Micro-Business History > N80 - General, International, or Comparative; N - Economic History > N8 - Micro-Business History > N82 - U.S. ; Canada: 1913-

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