An escalation or automatic adjustment provision in a purchase contract for some good deters opportunistic behavior and automatically reallocates risk as its price changes.

Question

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An escalation or automatic adjustment provision is used to deter opportunistic behavior and automatically reallocates risk as the price of the good changes. This helps to ensure that both parties are protected against negative price fluctuations and encourages cooperation in the long-term business relationship.

An Escalation or Automatic Adjustment Provision in a Purchase Contract