Arbeitspapier
Promise, trust and betrayal: Costs of breaching an implicit contract
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 5c. 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.
- Language
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Englisch
- Bibliographic citation
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Series: Working Paper ; No. 2019-04
- Classification
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Wirtschaft
Sociology of Economics
General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Price Level; Inflation; Deflation
Basic Areas of Law: General (Constitutional Law)
Transactional Relationships; Contracts and Reputation; Networks
Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices
Food; Beverages; Cosmetics; Tobacco; Wine and Spirits
Marketing and Advertising: General
Micro-Business History: General, International, or Comparative
- Subject
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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
- Event
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Geistige Schöpfung
- (who)
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Levy, Daniel C.
Young, Andrew T.
- Event
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Veröffentlichung
- (who)
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Bar-Ilan University, Department of Economics
- (where)
-
Ramat-Gan
- (when)
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2019
- Handle
- Last update
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10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Levy, Daniel C.
- Young, Andrew T.
- Bar-Ilan University, Department of Economics
Time of origin
- 2019
Other Objects (12)
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Explicit Evidence on an Implicit Contract
Explicit Evidence on an Implicit Contract
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Promise, Trust and Betrayal: Costs of Breaching an Implicit Contract
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Promise, trust and betrayal: Costs of breaching an implicit contract
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Explicit Evidence on an Implicit Contract
Explicit Evidence on an Implicit Contract
Explicit Evidence of an Implicit Contract
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Location costs, product quality, and implicit franchise contracts
Implicit Trade Costs and European Single Market Enlargement
Implicit Trade Costs and European Single Market Enlargement