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.
| Original language | English |
|---|---|
| Pages (from-to) | 1031-1051 |
| Number of pages | 21 |
| Journal | Southern Economic Journal |
| Volume | 87 |
| Issue number | 3 |
| DOIs | |
| State | Published - Jan 2021 |
Bibliographical note
Publisher Copyright:© 2020 by the Southern Economic Association
Funding
We are grateful to two anonymous reviewers for constructive comments and suggestions which improved the article significantly. We thank the seminar participants at the 2017 Italian Law and Economics Association annual conference at the Libera Università Maria Ss. Assunta in Rome, at the 2018 Economic History Association of Israel annual conference at Tel Aviv University in Ramat-Aviv, at the 2015 Israeli History and Law Association annual conference at the Ben-Zvi Institute in Jerusalem, and at Bar-Ilan University in Ramat-Gan, for comments and suggestions. In particular, we thank Joel Mokyr, Alexander Stremitzer, Ansgar Wohlschlegel, Dror Goldberg, Igor Livshits, David Klein, Avichai Snir, Itamar Caspi, and Osnat Peled, for helpful comments and suggestions. We are grateful to Dan Schwarzfuchs and David Geffen for bringing to our attention a 1935 change in the Secret Formula, which we were unaware of. We rotate co-authorship. All errors are ours.
| Funders | Funder number |
|---|---|
| Italian Law and Economics Association | |
| Tel Aviv University |
Keywords
- Coca-Cola
- New Coke
- cost of breaching a contract
- cost of breaking a contract
- cost of price adjustment
- cost of quality adjustment
- customer market
- exit
- implicit contract
- invisible handshake
- long-term relationship
- loyalty
- nickel Coke
- sticky/rigid prices
- voice