Promise, Trust and Betrayal : Costs of Breaching an Implicit Contract

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. Thisimplicit contract included a promise of constant quality. We offer two types of evidence of thecosts of breach. First, we document a case in 1930 when the Coca-Cola Company chose to avoidquality adjustment by incurring a permanently higher marginal cost of production, instead of aone-time increase in the fixed cost. Second, we explore the consequences of the company’s 1985introduction of “New Coke” to replace the original beverage. Using the Hirschman’s (1970) modelof Exit, Voice, and Loyalty, we argue that the public outcry that followed New Coke’s introductionwas a response to the implicit contract breach