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Promise, trust, and betrayal: Costs of breaching an implicit contract
Author(s) -
Levy Daniel,
Young Andrew T.
Publication year - 2021
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/soej.12479
Subject(s) - betrayal , coca cola , quality (philosophy) , business , implicit contract theory , implicit cost , loyalty , microeconomics , production (economics) , economics , law and economics , marketing , total cost , advertising , management , psychology , social psychology , philosophy , epistemology , labor relations
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.