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

Daniel Levy () and Andrew T. Young

EconStor Preprints from ZBW - Leibniz Information Centre for 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; Sticky Prices; Long-Term Relationship; Coca-Cola; Nickel Coke; Price Rigidity; 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)
Date: 2019
New Economics Papers: this item is included in nep-cta and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Promise, trust, and betrayal: Costs of breaching an implicit contract (2021)
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)
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