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Long-Term Contracting with Markovian Consumers

  • Marco Battaglini

To study how a firm can capitalize on a long-term customer relationship, we characterize the optimal contract between a monopolist and a consumer whose preferences follow a Markov process. The optimal contract is nonstationary and has infinite memory, but is described by a simple state variable. Under general conditions, supply converges to the efficient level for any degree of persistence of the types and along any history, though convergence is history-dependent. In contrast, as with constant types, the optimal contract can be renegotiation-proof, even with highly persistent types. These properties provide insights into the optimal ownership structure of the production technology.

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File URL: http://www.princeton.edu/~mbattagl/dyn_contract.pdf
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Paper provided by UCLA Department of Economics in its series Theory workshop papers with number 505798000000000048.

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Date of creation: 15 May 2003
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Handle: RePEc:cla:uclatw:505798000000000048
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