Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/202539
Authors: 
Levy, Daniel C.
Young, Andrew T.
Year of Publication: 
2019
Series/Report no.: 
Working Paper No. 2019-04
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 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.
Subjects: 
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: 
A14
E12
E31
K10
L14
L16
L66
M30
N80
Document Type: 
Working Paper

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