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

Daniel Levy () and Andrew T. Young

EconStor Open Access Articles and Book Chapters, 2021, issue 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.

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; Price Stickiness; Rigid Prices; Price Rigidity; Cost of Price Adjustment; Menu Cost; Cost of Quality Adjustment (search for similar items in EconPapers)
JEL-codes: E31 K10 L11 L16 L66 M20 M30 N80 N82 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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https://www.econstor.eu/bitstream/10419/226350/1/P ... d-Betrayal-FINAL.pdf (application/pdf)

Related works:
Journal Article: Promise, trust, and betrayal: Costs of breaching an implicit contract (2021)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019)
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019)
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