Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/226350
Authors: 
Levy, Daniel
Young, Andrew T.
Year of Publication: 
2021
Citation: 
[Journal:] Southern Economic Journal [ISSN:] 2325-8012 [Issue:] forthcoming
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.
Subjects: 
Invisible Handshake
Implicit Contract
Customer Market
Long-Term Relationship
Cost of Breaching a Contract
Cost of Breaking a Contract
Coca-Cola
New Coke
Exit, Voice, and Loyalty
Nickel Coke
Sticky Prices
Price Stickiness
Rigid Prices
Price Rigidity
Cost of Price Adjustment
Menu Cost
Cost of Quality Adjustment
JEL: 
E31
K10
L11
L16
L66
M20
M30
N80
N82
Document Type: 
Article
Document Version: 
Manuscript Version (Preprint)

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