Markov processes

Market share analysis

The probability that a machine that is functioning in one period will continue to function or will break down in next period.
The probability that a consumer purchasing brand A in one period will purchase brand B in next period.

Markov processes
A customer visits either Murphys Foodliner or Ashleys Supermarket

Shopping trips are referred to as trials of the process

Particular store selected in each trial is referred to as state of the system Thus, two states are defined as: State 1: The customer shops at Murphys Foodliner

State 2: The customer shops at Ashleys Supermarket

Transition probabilities for murphys and ashleys grocery sales

Next Weekly Shopping Period

Current Weekly Shopping Period

Murphys Foodliner Ashleys Supermarket

Murphys Foodliner

0.9

0.1

Ashleys Supermarket

0.2

0.8

Transition probabilities

Let pij represent transition probability from state i in a given period to state j in the next period

For grocery sales problem,

P = p11

p12

= 0.9 0.2

0.1 0.8

p21 p22

Week 1 Week 2 (Second (First Shopping Trip) Shopping Trip)

Probability of Each 2-week pattern (0.9)(0.9) = 0.81

0.9
Shop at Murphys

Shop at Murphys

0.9

0.1
Shop at Ashleys

(0.9)(0.1) = 0.09 (0.1)(0.2) = 0.02

Customer shopped last at Murphys Week 0

0.1
Shop at Ashleys

0.2

Shop at Murphys

0.8
Shop at Ashleys

(0.1)(0.8) = 0.08

State probability
i(n) = probability that the system is in state i in period n
1(1) = probability that the system is in state 1 in period 1 2(1) = probability that the system is in state 2 in period 1 i(n) is referred to as state probability since it denotes the probability that the system is in state i in period n Let 1(0) and 2(0) be the state probabilities at some initial starting point. If 1(0) = 1 and 2(0) = 0, then it means that as an initial condition customer shopped at Murphys last week. If 1(0) = 0 and 2(0) = 1, then what it means?

State probability
Generic representation is

(n) = [1(n)

2(n)]

For the grocery sales problem, [1(0) 2(0)] = [1 0] to show that as an initial condition customer shopped at Murphys Foodliner last week To find the state probabilities for period n+1, simply multiply the state probabilities for period n by the transition probability matrix.

State probability
(next period) = (current period) P
(n+1) = (n) P (1) = (0) P [1(1) 2(1)] = [1(0) 2(0)] p11

p12 p21 p22

=[1 0] 0.9

0.1
0.8

= [0.9 0.1]

0.2

State Probabilities For Future Periods Beginning Initially With A Murphys Customer
State Probability 1(n) 2(n) 0 1 0 1 2 3 4 5 6 7 8 9 10

0.8 0.78 0.74 0.72 0.70 0.69 0.68 0.67 0.9 0.68 3 1 7 3 6 4 6 6 0.1 0.21 0.25 0.27 0.29 0.30 0.31 0.32 0.1 0.32 7 9 3 7 4 6 4 4

State Probabilities For Future Periods Beginning Initially With An Ashleys Customer
State Probability 1(n) 2(n) 0 1 0 1 2 3 4 5 6 7 8 9 10

0.3 0.43 0.50 0.55 0.58 0.61 0.62 0.64 0.64 0.2 4 8 7 5 9 2 8 0 8 0.6 0.56 0.49 0.44 0.38 0.37 0.35 0.8 0.411 0.36 6 2 3 5 8 2 2

Steady State probabilities

1 - be the steady probability for state 1 and

2 - be the steady probability for state 2

Then [1(n+1) 2(n+1)] = [1(n) 2(n)] p11

p12

p21 p22 But for steady state, 1(n+1) = 1(n) = 1 & 2(n+1) = 2(n) = 2 [1 2] = [1 2] 0.9

0.1 0.2 0.8

exercise
Assume a third grocery store Quick stop groceries, enters the market. It is smaller than the other two but offers quick service and gasoline for automobiles to attract some customers who currently visit Murphys or Ashleys. Assume that transition probabilities are as below:

To

From
Murphys Ashleys Quickstop

Murphys
0.85 0.20 0.15

Ashleys
0.10 0.75 0.10

Quickstop
0.05 0.05 0.75

Compute Steady State Probabilities and Market Share (1000 customers)?

Accounts receivable analysis

Markov processes help to estimate allowance for doubtful accounts receivable.
Accounts receivable that uncollectible (bad debts). ultimately prove to be

Murphys has two aging categories for its accounts receivable: i) accounts that are classified as 0 - 30 days old; ii) accounts that are classified as 31 - 90 days old.

Murphys follows the procedure of aging the total balance in customers account as per oldest unpaid bill.

Accounts receivable analysis

Customers a/c balance as on Sept 30 Date of Purchase August 15 Sept 18 Sept 28 Amount Charged $25 10 50 85

As on Sept 30, this customer a/c falls in 31-90 day category as the oldest unpaid bill is dated Aug 15 and is 46 days old.

DIFFERENT STATES
One Dollar currently in accounts receivable can be in one of these states in future weeks (as the data is collected on weekly basis). Each week is a trial. And there are 4 states in each trial: State 1: Paid category State 2: Bad debt category State 3: 0 - 30 day category State 4: 31 - 90 day category

DIFFERENT STATES
Pij = probability of a dollar in state i in one week moving to state j in next week

P=

p11 p12 p13 p14

P21 p22 p23 p24

=
=

1
0

0
1

0
0

0
0

P31 p32 p33 p34

P41 p42 p43 p44

=
=

0.4

0.3

0.3
0.1

0.4 0.2 0.3

Absorbing state & fundamental matrix

P= 1

0
1 0

0
0 0.3

0
0 0.3 0.1

1
0

0
1

0
0

0
0

0 0.4

0.4 0.2 0.3

N - Fundamental matrix is given by N = (I - Q)-1

Where I is identity matrix, I = 1

0
0 1

estimating bad debts

Calculate N = (I - Q)-1 [Fundamental matrix] Calculate NR [Absorbing State Probability Matrix] Calculate BNR [To estimate the bad debts] where B = [b1 b2]; b1 = Total dollars in 0 - 30 day category and b2 = Total dollars in 31 - 90 day category

A large corporation has collected data on the reasons both middle managers and senior managers leave the company. Some managers eventually retire, but others leave the company prior to retirement for personal reasons including more attractive positions with other firms. Assume that the following matrix of one-year transition probabilities applies with the four states of the markov process as shown: (640 + 280) managers

exercise

Retirement

Leaves personal 0.00

1.00 0.07 0.01

Middle manager Senior manager

Retirement
Leaves - personal Middle manager Senior manager

1.00
0.00 0.03 0.08

0.00
0.00 0.80 0.03

0.00
0.00 0.10 0.88