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

Andrew Young, Daniel Levy

Research output: Contribution to journalArticlepeer-review

Abstract

We study the cost of breaching an implicit contract in a goods market. We build on a recent study of the US Coca-Cola market, 1886‒1959. An implicit contract promised a serving of Coca-Cola of constant quality (the “real thing”) and quantity (6.5oz in a bottle or from the fountain) at a constant 5¢ nominal price. We offer two types of evidence. First, we document a case that occurred in 1930, where the Coca-Cola Company chose to incur a permanently higher marginal cost of production, instead of a one-time increase in the fixed cost, to prevent a quality adjustment of Coca-Cola, which would be considered a breach of the implicit contract. Second, we explore the consequences of the Company’s 1985 decision to replace the original Coke with the “New Coke.” Using the model of Exit, Voice, and Loyalty (Hirschman 1970), we argue that the unprecedented public outcry that followed the New Coke’s introduction was a response to the Company’s breaching of the implicit contract. We document the di
Original languageEnglish
JournalSouthern Economic Journal
StatePublished - Jan 2021

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