Cost of Breaching an Implicit Contract

Daniel Levy, Andrew Young

Research output: Contribution to journalArticlepeer-review

Abstract

We offer evidence on the magnitude of the cost of breaching an implicit contract in the goods market, building on Young and Levy (2014) who document a presence of an implicit contract in the case of the rigidity of Coca-Cola’s price in the US during 1886‒1959. The implicit contract promised a 6.5oz Coke of a constant quality, the real thing, at a fixed price, 5¢. We offer two types of evidence. In the first, we document a case where the Coca-Cola Company chose to incur a permanently higher marginal cost of production in order to prevent a quality adjustment of Coca-Cola, because quality adjustment would be considered a breach of the implicit contract. In the second, we explore the consequences of the Coca-Cola Company’s decision in 1985 to change its “secret formula” by introducing the New Coke to replace the old (Classic) Coke. Analyzing the market’s reaction to the change, we demonstrate that the unprecedented angry public outcry that followed the New Coke’s introduction was a direc
Original languageEnglish
Pages (from-to)1031-1051
JournalSouthern Economic Journal
DOIs
StatePublished - Jan 2021

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