EconPapers    
Economics at your fingertips  
 

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

Daniel Levy () and Andrew T. Young

No 2019-04, Working Papers from Bar-Ilan University, Department of Economics

Abstract: We study the cost of breaching an implicit contract in a goods market, building on a recent study that documented the presence of such a contract in the Coca-Cola market, in the US, during 1886‒1959. The implicit contract promised a serving of Coca-Cola of a constant quality (the “real thing”), and of a constant quantity (6.5oz in a bottle or from the fountain), at a constant nominal price of 5¢. 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 direct and quantifiable costs of this implicit contract breach, and demonstrate that the indirect, although unquantifiable, costs in terms of lost customer goodwill were substantial.

Keywords: Implicit Contract; Cost of Breaching a Contract; Cost of Breaking a Contract; Invisible Handshake; Customer Market; Long-Term Relationship; Price Rigidity; Sticky Prices; Nickel Coke; Coca-Cola; Secret Formula. (search for similar items in EconPapers)
JEL-codes: A14 E12 E31 K10 L14 L16 L66 M30 N80 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2019-04
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://econ.biu.ac.il/sites/econ/files/working-papers/2019-04.pdf Working paper (application/pdf)

Related works:
Journal Article: Promise, trust, and betrayal: Costs of breaching an implicit contract (2021) Downloads
Journal Article: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2021) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2020) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019) Downloads
Working Paper: Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:biu:wpaper:2019-04

Access Statistics for this paper

More papers in Working Papers from Bar-Ilan University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Department of Economics ().

 
Page updated 2021-04-12
Handle: RePEc:biu:wpaper:2019-04