We extend Ziv and Lempel's model of finite-state encoders to the realm of lossy compression of individual sequences. In particular, the model of the encoder includes a finite-state reconstruction codebook followed by an information lossless finite-state encoder that compresses the reconstruction codeword with no additional distortion. We first derive two different lower bounds to the compression ratio, which depend on the number of states of the lossless encoder. Both bounds are asymptotically achievable by conceptually simple coding schemes. We then show that when the number of states of the lossless encoder is large enough in terms of the reconstruction block length, the performance can be improved, sometimes significantly so. In particular, the improved performance is achievable using a random-coding ensemble that is universal, not only in terms of the source sequence but also in terms of the distortion measure.
Keywords: LZ algorithm; code ensemble; finite-state encoders; lossy compression; random coding; rate-distortion; source coding; universal coding; universal distribution.