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

Southern Economic Journal (forthcoming)

29 Pages Posted: 12 Jun 2019 Last revised: 27 Nov 2020

See all articles by Daniel Levy

Daniel Levy

Bar-Ilan University - Department of Economics; Emory University - Department of Economics; International School of Economics at Tbilisi State University; Rimini Centre for Economic Analysis; International Centre for Economic Analysis

Andrew T. Young

Texas Tech University - Rawls College of Business

Date Written: May 26, 2019

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: 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

JEL Classification: A14, E12, E31, K10, L14, L16, L66, M30, N80

Suggested Citation

Levy, Daniel and Young, Andrew T., Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract (May 26, 2019). Southern Economic Journal (forthcoming), Available at SSRN: https://ssrn.com/abstract=3394578 or http://dx.doi.org/10.2139/ssrn.3394578

Daniel Levy (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 5290002
Israel
+972 3 531-8345 (Phone)
+972 3 738-4034 (Fax)

HOME PAGE: http://econ.biu.ac.il/en/levy

Emory University - Department of Economics ( email )

1602 Fishburne Drive, Suite 306
Rich Building
Atlanta, GA 30322-0001
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/biography/levy-daniel.html

International School of Economics at Tbilisi State University ( email )

16 Zandukeli Street
Tbilisi, 0108
Georgia

Rimini Centre for Economic Analysis ( email )

Rimini
Italy

HOME PAGE: http://https://www.rcea.world/

International Centre for Economic Analysis ( email )

Wilfrid Laurier University
75 University Ave W.
Waterloo, Ontario N2L3C5
Canada

HOME PAGE: http://https://iceanet.org/

Andrew T. Young

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States

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