American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Long-Term Contracting with Markovian Consumers
American Economic Review
vol. 95,
no. 3, June 2005
(pp. 637–658)
Abstract
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.Citation
Battaglini, Marco. 2005. "Long-Term Contracting with Markovian Consumers." American Economic Review, 95 (3): 637–658. DOI: 10.1257/0002828054201369JEL Classification
- D86 Economics of Contract: Theory