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“SPEED OF REPLACEMENT”

:
MODELING BRAND LOYALTY USING LAST-MOVE DATA










Hai Che
1

Assistant Professor of Marketing
Walter A. Haas School of Business
University of California at Berkeley
haiche@berkeley.edu




P.B. (Seethu) Seetharaman
Professor of Marketing
Jesse H. Jones Graduate School of Management
Rice University
seethu@rice.edu








March 2008




1
The authors are listed in alphabetical order and contributed equally to this project. The authors thank Myung-Soo
Lee and Brian Ratchford for generously making their survey data available for the authors’ use in this study.
Comments may be sent to haiche@berkeley.edu.








“Speed of Replacement”:
Modeling Brand Loyalty Using Last-Move Data




Abstract

We study brand loyalties for durable goods using automobile survey data that are peculiarly
censored in the sense of only tracking elapsed times since transitions, and not the transition times
themselves. This censoring problem is typical of durable goods survey data that are
commercially available from survey research firms. However, there has been little to no attention
paid to such “last move” data in the statistics literature, far less the marketing literature on the
analysis of transition times. For this purpose, we propose a Multi-State, Continuous-Time,
Markov model with a parsimonious brand loyalty structure. We then propose a suitable
estimation approach to recover the parameters of our proposed statistical model using the
automobile survey data.

We obtain several interesting substantive findings using our proposed empirical procedure. A
few key findings are the following: (1) Chrysler is significantly “weaker” than GM and Ford, in
the sense of enjoying the lowest brand loyalty during the study period, (2) Male / Single / Older /
Higher-income / Less-educated consumers are more brand loyal than Female / Married /
Younger / Lower-income / More-educated consumers, (3) Our proposed non-stationary model –
with its parsimonious brand loyalty structure -- fits even better than a fully un-restricted (and,
therefore, highly parameterized) transition structure, under the traditional stationarity
assumption, for brand choice outcomes.

We illustrate the managerial implications of our proposed model by predicting time-varying
market shares of brands in periods subsequent to the period of analysis.


Keywords: Brand Loyalty, Last Move Data, Durable Goods, Automobiles, Transition Times,
Transition Hazards, Competing Risks Models, Continuous-Time Markov Processes, Non-
Stationary Markov Processes.

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“Speed of Replacement”:
Modeling Brand Loyalty Using Last-Move Data

1. Introduction
Companies employ loyalty-based management to increase the profitability of their
enterprises by managing customer churn. Several company case studies over the past decade
have shown that small improvements in customer retention can substantially improve company
profits (see, for example, Reichheld 1996). Understanding and managing brand loyalty is
especially critical in durable goods industries (such as the automobile industry), where products
on the one hand involve large profit margins, but on the other hand involve long replacement
cycles for buyers. The latter issue (i.e., long replacement cycles) makes it challenging for
automobile manufacturers to ensure that consumers repeat-purchase within the same company
franchise when it is time for a customer to replace their automobile. In order to stimulate repeat-
purchasing behavior for their brands, automobile manufacturers must first obtain an accurate
description of consumers’ brand loyalties for existing brands using readily available (typically,
survey) data. We address this issue in this paper.
We present an empirical approach to estimate brand loyalties of automobile brands using
“last move data,” i.e., retrospective event history data (tracked using a survey administered at a
fixed point of time, such as the J.D. Power Automotive Survey), in which the available
information for each respondent are (1) the currently owned automobile brand (say, brand j) at
the time of the survey, (2) the previously owned automobile brand (say, brand i), and (3) the time
at which the i → j transition occurred. In doing this, we make a methodological contribution to
the literature on hazard models of event times.

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Using our proposed approach, we estimate the brand loyalty associated with each
automobile brand, that takes into account both (1) the extent of repeat-purchasing behavior (i.e.,
the share of consumers in the market who repeat-purchase the brand), as well as the (2) the speed
of replacement (i.e., elapsed time until a consumer’s repeat-purchase of the brand). Existing
empirical approaches in the brand loyalty literature pertaining to durable goods only account for
(1), but not for (2) (as will be explained in the next section).
2
However, if Ford cars are repeat-
purchased sooner than GM cars in the data, it may be indicative of stronger brand loyalty for
Ford in the marketplace beyond what is accounted for by simply counting the number of repeat
purchases of Ford cars in the data. Our approach explicitly accounts for such “speed of
replacement” effects in the estimation of brand loyalty.
Our proposed econometric model represents a Multi-state, Continuous-Time, Markov
process whose parameters are non-stationary over time. We incorporate a parsimonious structure
of brand loyalties within this model, that reduces the number of estimable parameters
substantially compared to a model with a fully unrestricted transition rate matrix, and then
compare the empirical performance of the parsimonious specification versus that of the
unrestricted specification.
The rest of the paper is organized as follows. In section 2, we position our paper relative
to the existing literature on brand loyalty and inter-purchase times. Section 3 presents the model.
Section 4 discusses the last move data, as well as our proposed estimation technique. Estimation
results are presented and discussed in section 5. We discuss managerial implications in Section 6,
while Section 7 concludes with a summary and directions for future research.


2
The aggregate number of transitions for a brand-pair in the market is, in general, not a sufficient statistic for the
distribution of inter-purchase times associated with the brand-pair.

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2. Literature Review
2.1 Empirical Models of Brand Loyalties for Durable Goods
An influential paper on the estimation of brand loyalties for brands of durable goods
using the aggregate transition matrix – which tracks the number of consumers who make the
transition from a given brand to another brand (including itself), among all possible brand pairs,
over a fixed time interval – is that of Colombo and Morrison (1989). In addition to providing
elegant and parsimonious market-based measures of brand loyalties, the authors (successfully)
urge marketing researchers to collect the type of survey data that is necessary to estimate their
model. They illustrate the application of their “mover-stayer” approach using survey data from
20,000 new car buyers in 1963. Since the dataset used by the authors does not track the elapsed
time between successive automobile purchases of a given buyer, the proposed approach of using
the transition matrix to estimate brand loyalties is appropriate and meaningful. However, the
Colombo and Morrison (1989) approach ignores the effects of consumers’ inter-purchase times.
Suppose Ford buyers replace their cars faster than GM buyers, it is possible that Ford’s brand
loyalty is stronger than that of GM even if GM currently has more buyers than Ford. Such effects
cannot be captured in the Colombo and Morrison (1989) approach. An approach similar to that
of Colombo and Morrison (1989) is used by McCarthy, Kannan, Chandrasekharan and Wright
(1992) to estimate brand loyalties using J.D. Power survey data collected from 30,142 new car
buyers in 1985. Mittal and Kamakura (2001) use a binary probit model to investigate brand
loyalties of the customers of an automobile firm, in terms of whether or not they repeat-purchase
from the same firm for their next automobile purchase.
Bayus (1992) applies the mover-stayer approach of Colombo and Morrison (1989) to
estimate brand loyalties in four different durable goods categories using survey data from 50,000

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households that bought one or more of the mentioned categories in 1985. Unlike Colombo and
Morrison (1989), Bayus (1992) additionally observes the time elapsed between successive
purchases of a household within each category. This information is used to separate buyers
within a category into 3 groups: early replacers, average replacers, and late replacers (using
appropriate cutoffs in the empirical distribution of inter-purchase times estimated using the data).
The author then estimates the Colombo and Morrison (1989) model separately for the three
groups. The author finds a relationship between replacement times and brand loyalties in that late
replacers are more likely to be brand loyal than early replacers. While Bayus’ (1992) approach
accounts for the effects of inter-purchase times within the Colombo and Morrison (1989)
framework, it does not explicitly extend the modeling framework to handle inter-purchase times
as endogenous outcomes of the model, as we do in this paper. More importantly, unlike Bayus
(1992), as is typical of durable goods survey data, we do not observe the elapsed time between a
household’s successive purchases in the category. Instead, we observe the elapsed time between
the household’s most recent purchase in the category and the time of the survey (both of which
are identical in Bayus’ study since the survey is administered only to current buyers of the
product). This yields data, called last move data, which are typical of survey data that are tracked
by marketing research firms to study durable goods purchases. Our approach illustrates, for the
first time in the marketing literature, how to estimate brand loyalties using last move data.

2.2 Empirical Models of Inter-Purchase Times and Brand Choices
Two approaches have been previously used to simultaneously model inter-purchase times
and brand choices of households. These are (1) the “competing risks” model (Vilcassim and Jain
1991, Gonul and Srinivasan 1993, Wedel, Kamakura, Desarbo and Hofstede 1995, Seetharaman

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and Chintagunta 2003), and (2) the “Dynamic McFadden” model of Chintagunta and Prasad
(1998). In the first approach, the authors use competing hazard functions for all possible brand-
pair transitions that are observed in the data. In the second approach, the authors use a hazard
function for inter-purchase times (that are category- and not brand-specific), and a conditional
logit model for brand choices. Both approaches – that are illustrated using consumer buying data
in frequently purchased, non-durable product categories – are inapplicable in our durable goods
case for two reasons: (1) we do not observe completed inter-purchase times of households, and
(2) we do not observe a (small-sized) consideration set for brand choices at the household-level
(which makes the second approach infeasible). Therefore, it is impossible to estimate either
hazard functions of inter-purchase times, or logit functions of brand choices, using these
previously proposed estimation approaches on our data.
Given the data idiosyncrasies associated with our empirical context (as explained above),
we propose an empirical approach that is inspired by a recent paper by Schmertmann (1999). In
this paper, Schmertmann (1999) shows how to estimate transition rates among alternatives using
last move data. This approach is based on a Multi-State, Continuous-Time, Stationary Markov
process characterizing consumers’ transitions among alternatives. The stationarity assumption
(which makes the transition hazard rates time-invariant, or exponential), coupled with a
numerical approximation procedure, is used to predict the aggregate numbers of transitions in the
data. This is a clever proposal to deal with last move data.
In this paper, we propose a Multi-State, Continuous-Time, Non-Stationary Markov
Model (discussed in the next section) of respondents’ brand-pair transitions, which treats both (1)
the origin and destination states (i.e., brand choices) of a transition, as well as (2) the time
elapsed between the origin and destination states of each transition, as outcomes in the model.

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Since the elapsed times between transitions are not actually observed in last move data, we
employ an estimation approach (explained in section 4) that addresses this issue. Our statistical
model is more flexible than that of Schmertmann (1999) in that we use a non-stationary Markov
process (which can allow for arbitrary shapes of hazard functions characterizing transitions) to
characterize the observed transitions among brands. This is an important modeling innovation
since one would intuitively expect consumers’ replacement probabilities for their currently held
automobiles to increase since time elapsed since their previous purchase of an automobile.
Schmertmann’s (1999) model, on the other hand, would restrict these replacement probabilities
to be time-invariant (and, in fact, this restriction is central to the workability of his estimation
procedure). Also, our estimation approach employs exact likelihood functions for the
disaggregate transition choices that are observed at the household-level, while Schmertmann’s
(1999) approach relies on numerically approximated moment conditions for the aggregate
numbers of transitions that are observed at the market-level. This makes it easy to accommodate
the effects of respondent-specific demographic variables in our approach, while it is difficult, if
not impossible, to do so in Schmertmann’s (1999) approach (since it relies on aggregate, as
opposed to household-level, transitions). In other words, we are able to investigate whether
household-specific demographics such as age, income etc. influence households’ brand loyalties,
which is of enormous practical interest to marketing practitioners.

3. Model

3.1. Notation

A survey is taken at time T . The survey collects information on the most recent choice of
automobile brand – in terms of both which brand was purchased and when it was purchased – by

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the respondent prior to the survey date T . We denote this brand j (which is one of J available
brands of automobiles), and the time elapsed since its purchase (also called “backward
recurrence time”) u . The survey also records the brand that was previously owned by the
respondent before buying brand j . We denote this brand i (which is also one of the J available
brands of automobiles). The survey collects information on respondent demographics (income,
education, marital status etc.) and attitudes (e.g., satisfaction). We denote this vector X .
Let ( )
ij
F t and ( )
ij
f t denote the cumulative distribution function (CDF) and probability
density function (PDF) characterizing the i j → transitions (which are not actually observed in
the data, but must be estimated using last moves only, as will be explained in the estimation
section later).

3.2. Proposed Multi-State, Continuous-Time, Non-Stationary Markov Model
A household’s instantaneous probability (or hazard function) of making a transition from
brand i to brand j , conditional on the elapsed time ( t ) since the household’s purchase of brand
i , is assumed to evolve according to a Multi-State, Continuous-Time, Non-Stationary Markov
process. This Markov process is represented by a J J × transition matrix µ , whose elements
( ) ( , 1,..., , 0)
ij
t i j J t µ = ≥ denote the hazard functions associated with the transitions, as shown
below.

11 1
22
1, 1
1
( ) ( )
( )
.
( )
( ) ( )
J
J J
J JJ
t t
t
t
t t
µ µ
µ
µ
µ µ
− −
| |
|
|
|
|
|
|
\ .

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In the above-mentioned matrix, it is useful to note that the diagonal elements represent the case
of the household repeat-buying the currently held brand. For example, a household that currently
owns a Ford automobile can replace it with another Ford automobile. Therefore, the diagonal
elements represent brand loyalties of households. It is also useful to note that the hazard function
associated with a household staying in the current state (i.e., not replacing the currently held
automobile, as represented by the appropriate row of the transition matrix given above) is given
by the negative of the sum of all the hazards within a given row. For example,
0
1
( ) ( )
J
i ij
j
t t µ µ
=
= −
¿

denotes the hazard function associated with not replacing brand i . The hazard function
associated with the i j → transition can be written as follows.
( )
( )
( )
( )
( )
,
1
ij ij
ij
ij ij
f t f t
t
F t S t
µ = =

(1)
where ( ) 1 ( )
ij ij
S t F t = − denotes the survivor function associated with the i j → transition.
Equation (1) can be re-written as follows.
( ) ( ) ( ),
ij ij ij
f t t S t µ = (2)
which, in turn, can be re-written as shown below.
( ) ( ) ( )
1
0
exp
t
J
ij ij ij
j
f t t w dw µ µ
=
| |
= −
|
\ .
¿
}
(3)
In this model specification, one can allow ( )
ij
t µ to follow a suitably chosen parametric
distribution, such as exponential, weibull, erlang-2, log-logistic, log-normal, expo-power etc. To
summarize, our model (represented by equation (3)) can be understood as follows: A household
that currently owns automobile brand i at time t can continue to hold on to its currently held
brand, and ( )
0 i
t µ represents this option. On the other hand, the household can choose to replace

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its currently held automobile, in which case it faces J replacement possibilities, and
( ) ( 1,..., )
ij
t j J µ = represent these options. In text-book discussions of the continuous-time
Markov model, the diagonal elements of the transition matrix typically represent the option of
continuing in the current state. In our application, however, the diagonal elements represent the
option of repeat-buying the same brand, while ( )
0 i
t µ represent the options of continuing in the
current state (i.e., continuing to hold the current car).
If the Markov process is stationary, then the transition-specific hazard functions are time-
invariant, i.e., ( )
ij ij
t t µ µ = ∀ . This simplifies equation (3) to ( )
1
exp
J
ij ij ij
j
f t t µ µ
=
| |
= −
|
\ .
¿
. This
special case restricts transition times to follow an exponential (“memoryless”) distribution, and
has been used by Schmertmann (1999).
Since our interest in this study is in estimating brand loyalties of brands, we specify the
household’s transition-specific hazard functions, ( )
ij
t µ , as follows.

( ) ( ) ( ) ( ) ( )
( ) ( ) ( )
1 ,
1 ,
ii i i i i
ik i k
t h t h t
t h t
µ α δ α
µ α
= + + −
= −
(4)
where ( )
ii
t µ is the hazard function characterizing repeat-purchase of brand i , ( )
ik
t µ is the
hazard function characterizing a transition from brand i to brand k , where k i ≠ , ( )
i
h t is the
baseline hazard function characterizing the purchase of brand i , [0,1]
i
α ∈ represents the
household’s probability of being brand loyal towards brand i , and 0 δ > represents the increase
in the baseline hazard function for brand i that results because of brand loyalty.
Equation (4) can be understood as follows: Suppose a household is choosing to replace its
currently held automobile – brand i – at time t . With probability
i
α , this household will be in a

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brand loyal state towards brand i , and with probability 1
i
α − , this household will be in a
switching state away from brand i . The household’s conditional hazard function for repeat-
purchasing brand i will be higher (and equal to ( )
i
h t δ + ) if the household is in a brand loyal
state than if the household is in a switching state (when it will equal ( )
i
h t ). Similarly, the
household’s conditional hazard function for switching to brand k will be higher (and equal to
( )
k
h t ) if the household is in a switching state than if the household is in a brand loyal state
(when it will equal 0 ). This modeling extension that equation (4) overlays on the generic version
of our proposed model, as represented in equation (3), captures the spirit of Colombo and
Morrison’s (1989) elegant mover-stayer model of brand loyalty. Similar specifications have also
been widely used to model brand loyalties for packaged goods brands within discrete choice
models (see, for example, Givon 1984).
The modeling parsimony of the specification embodied in equation (4) over the fully
parameterized specification embodied in equation (3) can be appreciated, say, using the
stationary version of our proposed model (that involves time-invariant transition-specific hazard
functions). In that case, equation (4) involves only 2 1 J + estimable parameters (i.e.,
different '
i
J s α , different '
k
J h s , and δ ), while equation (3) involves
2
J estimable parameters
(i.e.,
2
different '
jk
J s µ ). For large values of J , this difference is significant (for example, with
10 J = , the parsimonious specification involves only 21 parameters, in contrast to the fully
parameterized specification involving 100 parameters!). Under the more general version of our
proposed model (that allows transition-specific hazard functions to be non-stationary and,
therefore, involve more parameters), the computational simplicity of the parsimonious
specification over the fully unrestricted specification will be even more remarkable.

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Next, we specify the baseline hazard function characterizing the household’s purchase of
brand j , i.e., ( )
j
h t , to follow a log-logistic distribution, as shown below.

( )
( )
( )
1
,
1
( , 0)
j
j
j j j
j
j
j j
t
h t
t
λ
λ
γ λ γ
γ
γ λ

=
+
>
(5)
This renders the Markov process to be non-stationary. The reason for this choice of baseline
hazard function is that Chintagunta and Haldar (1998) and Chintagunta and Prasad (1999) show
this distribution to outperform alternative distributions using durable goods replacement data.
3

Since the log-logistic distribution involves two parameters, this introduces J additional
estimable parameters (one for each brand).
Last, but not least, we allow the brand loyalty parameters of the household to be linear
functions of the household-specific covariates (i.e., demographic characteristics, and satisfaction
scores for the currently owned brand), as shown below.

0
,
i i
X α α β = + (6)
where
0i
α refers to the base level of brand loyalty associated with brand i, X is an M-
dimensional row vector of covariates pertaining to the household, and β denotes the
corresponding column-vector of parameters (which captures the effects of demographics and
satisfaction on brand loyalty). This introduces M additional estimable parameters.
This completes our exposition of our proposed model. We discuss our proposed
estimation approach – that handles the peculiar censoring that is associated with last move data

3
Seetharaman and Chintagunta (2003) demonstrate the empirical superiority of the log-logistic distribution to other
distributions using purchase timing data on packaged goods. In our case, we empirically verified that the log-logistic
distribution was superior to the Erlang-2 distribution in terms of explaining our data.

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because only the elapsed time u is observed, while the transition time associated with the
observed i j → transition is unobserved – in the next section, after we describe the data.

4. Data and Estimation
4.1. Data
Data used in this study was collected using a mail survey in February 1990
4
. The dataset
contains 901 respondents. Eliminating surveys with missing information leaves us with 870
respondents for our analysis (see Ratchford, Lee and Talukdar (2003) for a complete description
of the data).
For each respondent, we know (1) the brand name of the automobile that is currently
owned by the respondent, (2) the respondent’s date of purchase of this currently owned
automobile, and (3) the brand name of the previously owned automobile of the respondent.
These three variables are used to construct the outcome variables associated with our proposed
statistical model. In addition, we observe demographic characteristics of the survey respondents
(gender, marital status, age, income, education etc.), as well as satisfaction scores for their
previously owned brands (on an ordinal scale with categories 1-7). Mittal and Kamakura (2001)
and Lambert-Pandraud, Laurent and Lapersonne (2005) find that older buyers are more brand
loyal than younger buyers. We can test whether such findings obtain for automobile purchases
using our dataset. In addition, we can also test the implications of the other available
demographics in our dataset on brand loyalty.
We aggregate brand names to the level of the manufacturer and confine our attention to
estimating brand loyalties for manufacturer names, i.e., General Motors (GM, henceforth), Ford

4
The collectors and owners of the data are Myung-Soo Lee (Baruch) and Brian Ratchford (UT-Dallas). We thank
them for their generosity in sharing their data with us.

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and Chrysler (which are the three largest share firms represented in our survey data, the
remaining brands/manufacturers are collapsed in to a composite brand called “Other”).
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Table 1
reports the brand switching matrix associated with these brand names (Note: This brand
switching matrix is the necessary input for the Colombo and Morrison (1989) approach of
estimating brand loyalties). From this table, it is clear that GM is the largest among the three
brands. Also, the transition probability associated with repeat-purchase is the lowest for Chrysler
(0.35) and is much higher for both GM (0.60) and Ford (0.62). This suggests that Chrysler may
have the lowest brand loyalty among the “Big Three” US manufacturers during the study period.
Among the transition probabilities associated with brand switching away from Chrysler, the
value associated with the Chrysler → GM switch (0.27) is much higher than that associated with
the Chrysler → Ford switch (0.16), which implies that Chrysler is more vulnerable to GM’s
competitive threat than it is to Ford’s competitive threat.
[Insert Table 1 here]
While Table 1 reveals the aggregate transition patterns in the data, it does not reveal the
patterns of inter-purchase times associated with the various brand-pair transitions. Our proposed
model is designed to address this issue. Next, we discuss how to estimate our proposed model on
the dataset.

4.2. Estimation
The estimation problem pertains to our ability to estimate the transition hazards –
( ) ( , 1,..., , 0)
ij
t i j J t µ = ≥ – using the available last move data. In traditional purchase timing

5
This is done for two reasons: (1) expositional convenience, and (2) small sample size. In practice, it is
straightforward to extend our proposed approach to investigate brand loyalties at the level of make/model
combinations using datasets with larger numbers of respondents, such as commercial datasets available from
marketing research firms.

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datasets – such as scanner panel data – completed purchase spells of households are observed.
Therefore, the estimation strategy involves the computation of the probability density function
associated with each inter-purchase spell of a household. In our case, however, completed inter-
purchase spells are not observed. We observe only the time elapsed since the most recent
transition (i.e., a “right-censored” incomplete spell), as well as the origin and destination states
(i.e., brand choices) associated with the transition, for each household. We next discuss how to
deal with estimation in this setting.
We employ the likelihood approach to estimation. We treat each household h’s
contribution to the sample likelihood function as arising from two sources, one being the
transition – represented by a particular brand pair ,
h h
i j where
h
i is the brand being switched
from, and
h
j is the brand being switched to – and the other being the time elapsed since the
transition,
h
u , until the period of survey. The contribution of the first source is simply the hazard
function associated with the transition, i.e., ( )
h h
i j h
t µ . The contribution of the second source is the
survivor function associated with the elapsed time since the transition, i.e.,
( )
*
1
0
exp
h
h h
u
J
j j k
k
S t dt µ
=
| |
= −
|
|
\ .
¿
}
, which represents the probability that all possible transitions from
state
h
j are “survived” by the household over the time interval
h
u . In other words, the sample
likelihood function can be written as follows.
( ) ( )
1 1
0
exp ,
h
h h h
u
H J
i j h j k
k h
L t t dt µ µ
= =
| |
= −
|
|
\ .
¿ ∏
}
(7)
where H stands for the total number of households in the sample,
h
t stands for the
(unobserved) inter-purchase time between household h ’s purchases of brands
h
i and
h
j , and
h
u

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stands for the (observed) elapsed time since household h ’s most recent transition. In the
stationary Markov process case (i.e., when ( )
ij
t µ does not depend on t ), the above-mentioned
likelihood function reduces to the following.

1 1
exp .
h h h
H J
i j h j k
k h
L u dt µ µ
= =
| |
= −
|
\ .
¿ ∏
(8)
In other words, in the stationary Markov process case, the econometrician bears no consequences
of not observing household-specific inter-purchase times,
h
t , since only the elapsed times,
h
u ,
appear in the sample likelihood function! The above-mentioned sample likelihood function can
be straightforwardly maximized using gradient-based techniques to obtain consistent estimates of
all model parameters. In fact, this is the estimation strategy employed by Schmertmann (1999),
except that he proposes a numerical approximation for the expected number of aggregate
transitions for each of the transitions in the data, and then uses a method-of-moments estimator
to minimize the distance between these expected numbers and their observed counterparts.
However, such an estimator cannot incorporate the effects of household variables in the
estimation since the estimation equation relies on aggregate transitions. Our interest in this study
is to both allow for non-stationarity in the Markov process, as well as investigate the effects of
household variables on brand loyalties (by allowing ( )
ij
t µ to depend on X , as shown in
equations (4) and (5)). We discuss how to estimate our model next.
In the non-stationary Markov process case, equation (7) does not reduce to equation (8),
and must be used directly for estimation purposes. The problem with using equation (7) directly,
however, is that household-specific inter-purchase times,
h
t , are not observed in last move data.
Only elapsed times,
h
u , are observed. Therefore, we must treat unobserved inter-purchase times,
h
t , as latent variables and then maximize the appropriate sample likelihood function – given in

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equation (7) – that results from a suitable specification of the latent variables. If the maximized
value of the resulting sample likelihood function turns out to be higher than that obtained from
maximizing equation (8), that would be an empirical testament to the superiority of the non-
stationary Markov process over the stationary Markov process implied by equation (8). This is
the estimation strategy that we undertake in this study.
Treating the unobserved inter-purchase times as latent variables in our model is
reminiscent of the problem of treating unobserved lagged choices prior to the sample period as
latent variables in discrete choice models, also called the “endogenous initial conditions
problem” for state dependence models (Honore and Kyriazidou 2000). We use the following
latent variable specification for unobserved values of
h
t in the data:
6


*
,
h h
h h i j h
t u t τ ε = + + (9)
where 0 τ ≥ is an estimable parameter,
2
~ (0, )
h
N ε σ is an error term that is assumed to be iid
across households, and
*
h h
i j
t is the mode associated with the log-logistic transition density,
h h
i j
µ ,
characterizing the
h h
i j → transition that is observed for household h, and is given by the
following formula.

1/
*
1
1
.
j
h
h
h
h h
h
j
j
i j
j
t
λ
λ
λ
γ
| | −
|
|
+
\ .
= (10)
The intuition for using this latent variable specification is that the (observed) elapsed time since
the most recent purchase of the household until the period of the survey,
h
u , must be informative

6
It is important to note that in using this latent variable specification, our approach generalizes the stationary
Markov process approach of Schmertmann (1999), where the exponential hazard assumption is invoked to make the
endogenous initial conditions problem “go away.” One of the estimable versions of our proposed model indeed
allows for Schmertmann’s “memoryless” exponential hazards to test the reasonableness of his approach on our data.
We find that our approach significantly improves upon his approach.

17
about the (unobserved) inter-purchase time,
h
t , between the household’s purchases of brand
h
i
and
h
j in the sense that the larger the observed value of
h
u , the larger one would expect the
unobserved value of
h
t to be. Moreover, the mode of the log-logistic transition density
characterizing the
h h
i j → transition is the most likely value of the inter-purchase time
characterizing the i j → transition. Therefore, one would expect the unobserved value of
h
t to
be “close” to this modal value. We use τ to capture the relative weight that one can give one
proxy, relative to the other, in imputing the unobserved values of
h
t . Given this latent variable
specification, the conditional household likelihood function (given a random draw ˆ
h
ε of
h
ε from
2
(0, ) N σ ) for household h is (the derivation is available in a web-based appendix)

( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( ) ( )
0
1
I 1 *
exp I 1 ,
h h h h
h
h h
h i j h h h i j h
J
u
j k h j k
k
L h t i j h t
h t j k h t dt
α δ α
α δ α
=
(
= + = + −
¸ ¸
(
(
− + = + −
(
¸ ¸
¸ ¸
¿
}

(11)
where ( )
h h
I i j = is an indicator function that take the value 1 when
h h
i j = , and 0 otherwise,
( )
h
I j k = is an indicator function that take the value 1 when
h
j k = , and 0 otherwise,
h
t

is the
value of
h
t (yielded by equation (9)) that corresponds to the random draw ˆ
h
ε of
h
ε and

( )
( )
( )
1
,
1
( , 0)
k
k
k k k
k
k
k k
t
h t
t
λ
λ
γ λ γ
γ
γ λ

=
+
>
(12)
under the log-logistic specification for the transition-specific hazard functions. The
unconditional household likelihood function is obtained by averaging the conditional likelihood
functions (yielded by equation (11)) over all draws ˆ
h
ε of
h
ε . The sample likelihood function is
then obtained by taking the product of these unconditional household likelihood functions over

18
all households in the sample, which is maximized using gradient-based techniques to obtain
maximum likelihood estimates of model parameters.
7
This completes our exposition of our
proposed estimation approach. Next we discuss the empirical results.

5. Empirical Results
There are 870 survey respondents in the sample, and descriptive statistics pertaining to
the sample are reported in Table 2. We can see that the average elapsed time since the most
recent automobile purchase is 7.26 months, and the standard deviation of the elapsed time is 4.08
months. In terms of marital status, 69% of the respondents are married, while 31% are single.
The average education across respondents is 14.74 years (with a standard deviation of 2.96
years), while the average income is $45,181 (with a standard deviation of $24.747). The average
satisfaction score across respondents is 5.37 (with a standard deviation of 1.74).
[Insert Table 2 here]
We estimate the following four versions of our proposed model of brand loyalties.
1. Full Model (includes both log-logistic hazards and demographic effects),
2. Stationary version (i.e., exponential, instead of log-logistic, hazards),
3. Stationary version without demographic effects,
4. Stationary version without demographic effects and loyalty structure (equation (4)).
Comparing the empirical performance of versions 1 and 2 will let us understand the importance
of modeling non-stationarity in the Markov process. Comparing the performance of versions 2
and 3 will let us understand the importance of demographic effects in explaining households’
brand loyalties. Comparing versions 3 and 4 will let us understand the consequences of adopting

7
Estimation is carried out in the C++ programming language.

19
a parsimonious representation of brand loyalty, as given by equation (4), instead of estimating a
fully unrestricted transition rate matrix. Model version 4 can be understood to be a maximum-
likelihood counterpart to the method-of-moments approach taken by Schmertmann (1999).
In Table 3, we report three fit statistics – Log-Likelihood (LL), Akaike Information
Criterion (AIC) and Schwarz Bayesian Criterion (SBC) – for each of the 4 versions of our
proposed model mentioned above. In terms of all three fit statistics, we observe that the full
model convincingly outperforms the remaining models. For example, the full model has fit
improvements of 20.4%, 20.3% and 19.9%, respectively, in terms of LL, AIC and SBC, over the
next best fitting model. This shows that the log-logistic hazard substantially improves our ability
to explain the observed transitions and elapsed times compared to an exponential hazard. Said
differently, the Multi-State, Continuous-Time Markov process is non-stationary over time.
8

Additionally, we find that allowing the parameters of the full model to be heterogeneous across
respondents – according to a random effects distribution -- does not improve model fit.
Interestingly, this finding departs from findings in packaged goods categories that there is
significant heterogeneity in hazard function parameters across households (see, for example,
Seetharaman and Chintagunta 2003). One reason for the departure could be that since our dataset
involves only a single observation at the respondent level (unlike packaged goods datasets that
involve several repeat purchases at the household level), it does not contain sufficient
information to reliably estimate heterogeneity across respondents.
Next, we find in Table 3 that the stationary version has fit improvements of 0.71%,
0.59% and 0.32%, respectively in terms of LL, AIC and SBC, over the stationary version without
demographics. This shows that demographic effects have only a modest (albeit statistically

8
We also estimated an Erlang-2 baseline hazard function (which also allows for a non-stationary Markov process)
and obtained LL, AIC, and SBC of -3263.40, 6554.80 and 6621.56, respectively. These represent fit improvements
of 7.32%, 7.26%, and 7.13% over the stationary model. Detailed results are available from the authors.

20
significant) degree of explanatory power, at least relative to the log-logistic specification of the
transition hazards, in explaining the estimated brand loyalties in the data. Lastly, we find that our
imposed loyalty structure slightly worsens the fit of the model, i.e., by 1.10%, 0.89% and 0.42%,
respectively in terms of LL, AIC and SBC. While this finding, at the face of it, may seem to
justify the estimation of a fully unrestricted transition rate matrix, we would argue that our
parsimonious representation of brand loyalty should be preferred despite the associated decrease
in model fit simply because the decrease is quite modest from using the parsimonious
representation. In fact, with much larger number of brands, it is possible that the parsimonious
representation may actually fit better, after adjusting for the decreased number of parameters,
than the unrestricted representation. More importantly, a statistical specification that explicitly
models brand loyalties (such as our parsimonious representation of brand loyalties) sheds
substantive light on the existing levels of loyalty for various brands in the market, which is of
enormous practical interest to marketing practitioners.
[Insert Table 3 here]
We present the estimation results for three versions of our proposed model, as mentioned
earlier, in Table 4. The results for the full version are presented in the fourth column of Table 4.
Among the “Big 3” US brands, Ford is found to enjoy the highest degree of brand loyalty (0.85),
with GM being second highest (0.76), and Chrysler being the lowest (0.71). The estimated value
of the increase in the hazard rate of buying a brand, conditional on being in a brand-loyal state, is
positive (0.02), as expected. This implies that a household in a brand-loyal state will show an
increased tendency to repeat-purchase the currently owned brand.
[Insert Table 4]

21
In Table 4, we observe several interesting effects pertaining to demographic effects on
brand loyalty.
9
We find that (1) married consumers are less brand-loyal than singles, (2) higher-
income consumers are more brand-loyal than lower-income consumers, and (3) more educated
consumers are less brand-loyal than less educated consumers. We can rationalize findings (2)
and (3) as follows: To the extent that higher-income consumers are more likely to buy more
expensive automobiles (such as Cadillac) for prestige reasons, they are more likely than lower-
income to repeat-purchase the same brand to maintain their “social status quo.” More educated
consumers, on the other hand, are more likely to keep track of the latest trends in the automobile
industry, new model releases etc., which makes them more likely than less-educated consumers
to switch to a different brand if a new brand is perceived to be the “coolest new car” regardless
of whether it is made by the same manufacturer of their currently owned car. We estimate a
positive effect of customer satisfaction on brand loyalty. This makes intuitive sense, and agrees
with the findings in Mittal and Kamakura (2001). In order to interpret the estimated log-logistic
hazard parameters, we plot the estimated hazard functions for the 16 possible brand-pair
transitions. We report the plots corresponding to i = GM in Figure 1.
[Insert Figure 1]
We find that the hazard functions are all monotonically increasing, which makes intuitive
sense for durable goods such as automobile brands, where one would expect a household’s
conditional probability of replacing their currently held automobile brand to increase over time.
In terms of the repeat-purchase transition hazards (i.e., i i → ), we find that both the GM GM →
and Ford Ford → transition hazards strictly dominate (as in these curves “lie above”) the
Chrysler Chrysler → transition hazard at all points of time. In terms of the switching transition

9
In contrast to our findings about demographic effects on brand loyalty for durable goods such as automobiles,
typically estimated effects of demographics on brand loyalty are found to be insignificant for non-durable goods.

22
hazards (i.e., i k → ), we find that the Chrysler GM → and Chrysler Ford → transition hazards
dominate the others. It is clear, therefore, that Chrysler appears to be in the weakest competitive
position in the market in terms of having insufficient repeat-purchases, as well as being
vulnerable to its existing customers switching away to its two main rivals.
Next, we investigate the substantive consequences of ignoring one or more aspects of our
proposed model, i.e., non-stationarity, covariates and the parsimonious loyalty structure implied
by equation (4).

5.1. Consequences of ignoring Non-Stationarity
In the third column of Table 4, we present the estimation results from a restricted version
of our proposed model that assumes the household’s transition rate matrix to be stationary, i.e.,
the hazard functions characterizing each transition are exponential (rather than log-logistic).
Comparing the third and fourth columns of Table 4, it is clear that the estimated brand loyalties
for all brands are significantly lower in magnitude if one ignores non-stationarity. The reduction
is most dramatic for GM (0.38, instead of 0.76). In terms of demographic effects, ignoring non-
stationarity renders the effect of marital status on brand loyalty to be insignificant. The effects of
income and education remain the same as before. The effect of satisfaction gets significantly
overstated (0.11, instead of 0.03). This indicates that existing statistical models of the satisfaction
→ loyalty link (such as Mittal and Kamakura 2001) may yield biased estimates of the link by not
taking into account the effects of time since last purchase.
10
In order to interpret the estimated
exponential hazard parameters, we plot the estimated hazard functions (as flat lines) for 12 out of
the 16 possible brand-pair transitions (see Figure 1). From comparing the (time-varying) log-

10
We thank an anonymous reviewer for suggesting this hypothesis and leading us to include satisfaction as a
covariate in our model.

23
logistic hazards to their (time-invariant) exponential counterparts, it is clear that not only are the
magnitudes of the transition rates severely under-estimated, but more importantly their
monotonically increasing shape is “camouflaged,” by the restrictive assumption that they are
time-invariant under the stationary model. Overall, comparing the third and fourth columns of
Table 4 makes it clear that wrongly assuming stationarity in the Markov process can
substantially weaken substantive inferences obtained about both brand loyalties, as well as
temporal replacement tendencies, of automobile consumers in the market.

5.2.Consequences of ignoring Covariates
In the second column of Table 4 we present the estimation results from a restricted
version of our proposed model that not only assumes the household’s transition rate matrix to be
stationary (as in the model represented in the third column of Table 4), but also ignores the
effects of household covariates. Comparing the second and third columns of Table 4, we find
that the estimated brand loyalties are slightly overstated if one ignores covariates. In terms of the
estimated hazard rates, the transition rates pertaining to a switch towards Ford automobiles are
overstated if one ignores covariates. Overall, we feel that ignoring covariates does not
substantially alter the substantive conclusions obtained regarding the included variables, which is
consistent with our earlier finding that model fit worsens only slightly by ignoring covariates in
the estimation.


24
5.3. Consequences of not imposing the Parsimonious Brand Loyalty Structure
In Table 5 we present (within parentheses) the estimation results from a restricted version
of our proposed model that not only assumes the household’s transition rate matrix to be
stationary (as in the model represented in the third column of Table 4), and ignores the effects of
household covariates (as in the model represented in the second column of Table 4), but also
does not impose the parsimonious brand loyalty structure proposed in equation (4) and, instead,
estimates the transition hazards in a completely unrestricted manner. In Table 5, we
simultaneously present the corresponding transition matrix that is implied by the parameter
estimates of the full version of our proposed model (as represented in the fourth column of Table
4). Comparing the two sets of numbers in Table 5, we see that the transition rates are remarkably
similar between the two. This shows that the parsimonious brand loyalty structure that we
propose is flexible enough to correctly recover the transition rates that one recovers under the
unrestricted model specification. Coupled with our earlier findings that model fit deteriorates
only slightly by imposing our proposed brand loyalty structure in the model, instead of
estimating the transition rates in a completely unrestricted manner, this shows that from a
statistical standpoint one loses little by employing a more parsimonious (and, therefore,
computationally elegant and intuitively interpretable) representation of brand loyalty. Further, as
mentioned earlier, to the extent that the focus of this study is on brand loyalties, a model (such as
the parsimonious representation) that explicitly models brand loyalties is easier to interpret and
of more practical value to marketing practitioners.
[Insert Tables 5 and 6]


25
5.4. Comparing our approach to Colombo and Morrison (1989)
For comparison purposes, we estimate the Colombo and Morrison (1989) model of brand
loyalties (which models only the aggregate numbers of transitions and does not model transition
times). The results from this model are presented in Table 6. We see that the Colombo and
Morrison (1989) points to Ford as the brand with the highest brand loyalty among the “Big 3”
US manufacturers, and to Chrysler as the brand with the lowest loyalty, both of which are
qualitatively consistent with the results from our proposed model. In terms of zero-order brand
choice probabilities, the Colombo and Morrison (1989) points to GM as the brand with the
highest value, and to Chrysler as the brand with the lowest value, which are also qualitatively
consistent with the estimates of baseline hazard rates implied by our proposed model (see, for
example, second column of Table 4). This underscores the practical value of the elegant model
of Colombo and Morrison (1989) in obtaining an excellent qualitative understanding of brand
loyalties in the automobile market. However, by additionally modeling transition times (as in our
proposed model), we can obtain a more complete understanding of brand loyalties in the market.
For example, using our proposed model, we can predict future (time-variant) market shares for
brands and perform policy simulations pertaining to the effects of marketing activities on such
shares (as we will demonstrate in the next section on Managerial Implications).
[Insert Table 7]
In order to test whether our model’s additional focus on modeling brand-pair specific
transition rates, compared to Colombo and Morrison (1989), weakens our model’s ability to
recover aggregate numbers of brand-pair transactions, we compare the aggregate transition
matrix implied by our proposed model to that estimated by the Colombo and Morrison (1989)
approach. These matrices are presented in Table 7. There appear to be some discernible

26
differences between the two tables, for example, with the estimated transition probability for the
Ford GM → transition being 0.14 under Colombo and Morrison (1989), and 0.10 under our
proposed model. In order to see which of these tables is “closer” to the “truth” (represented by
the observed transitions in Table 1(b)), we compute the root mean-squared error (RMSE)
associated with both tables, in relation to the actual transition probabilities observed in Table
1(b). We find the RMSE of our proposed model to be 0.01, while that associated with Colombo
and Morrison (1989) is 0.11. This shows that our model not only is able to account for two
separate sources of brand loyalty, i.e., a brand’s ability to encourage both consumers’ repeat-
purchases, and quicker product replacements by consumers, but also predicts the observed
transition probabilities better than the Colombo and Morrison (1989) model. We believe this
finding to be the coup-de-grace of our proposed modeling framework. Our proposed model
generalizes the elegant brand loyalty model of Colombo and Morrison (1989) by incorporating
the effects of transition times in their framework.

6. Managerial Implications
In order to demonstrate the practical usefulness of our proposed model of brand loyalties
for automobile brand manufacturers, we use our estimated model parameters to predict
unconditional monthly market shares of each of the three major brands in our data – GM, Ford
and Chrysler – over 12 months in the future, starting from the month following the period of
survey. This prediction exercise is done as follows: for each consumer (h) in the data, we
compute the discrete transition probability of the consumer making a transition from his/her
currently owned brand i
h
(which was purchased by the consumer u
h
months prior to the month of
survey) to brand j exactly t months from the month of survey, as shown below.

27
( ) ( ) ( ) ( )
1
1
1
exp exp 1 exp
h h h
h h h h
h h h
u t u t u t
J
i j i k i j i j
k
u u u t
k j
P t u du u du u du µ µ µ
+ + − +
=
+ −

| |
( | | | |
|
( = − − − − | |
| | |
(
|
\ . \ . ¸ ¸
\ .
¿
} } }
(13)
where u
h
stands for the elapsed time since the last purchase of consumer h. The above-mentioned
transition probability is then summed over all consumers in the data to obtain the unconditional
market share of brand j at time t. These predicted market shares are plotted for the three brands
in Figure 2.
[Insert Figure 2]
Our model is able to generate these time-varying market share forecasts because of the
non-stationarity that arises from modeling the effects of consumers’ inter-purchase times. Using
the model of Colombo and Morrison (1989), one cannot generate market share forecasts (since
their model ignores consumers’ inter-purchase times), far less such non-stationary market share
plots. Our demand forecasts can guide production decisions of automobile manufacturers.
We also perform a simulation exercise to understand the benefits of customer satisfaction
improvement programs for automobile manufacturers. For this purpose, we assume that
customer satisfaction scores for GM buyers in our sample (whose current average in the data is
5.58) increases by 0.5.
11
This leads to a predicted increase in market share, over the 12 months
following the study period, of 0.58% for GM (and a decrease of market share of 0.24% and
0.08% for Ford and Chrysler, respectively). The same assumption for Ford and Chrysler, taken
one at a time, leads to market share increases of 0.8% and 0.3%, respectively, for the two brands
(and decreases for GM and Chrysler of 0.38% and 0.15%, respectively, in the first case, and

11
If this procedure increases a GM buyer’s satisfaction score beyond 7 (as it would for any respondent whose
satisfaction score for GM was higher than 6.5), we decrease it to 7. This yields a new average satisfaction score
across all respondents in the data of 5.92.

28
decreases for GM and Ford of 0.08% and 0.14%, respectively, in the second case).
12
Every point
of market share in the US automobile industry is worth about 170,000 automobiles sold (Forbes,
July 3, 2006), and losing one point of market share for GM could mean the shutting down of one
of its plants. Given the high market stakes involved, it is incumbent upon GM to first quantify
the extent of brand loyalties for its brands, as well as the effects of customer satisfaction on these
loyalties, before they can address the strategic “what to do” question to manage customer churn.
For example, key drivers of customer satisfaction for automobiles include dealership service
quality (vehicle ready when promised, quality of work done, honesty etc.), automobile
accessories, roominess, handling, engine, transmission etc. (Mittal and Kamakura 2001, Mittal,
Kumar and Tsiros 1999).
Our empirical approach presents GM with a systematic way to quantify, using readily
available survey data, the extent of repeat-purchasing, switching away from, and switching to,
associated with each of its existing brands. A proper descriptive diagnosis of market conditions
using our proposed approach can assist GM in better planning its marketing strategies going
forward. For example, a GM brand with high estimated loyalty can be understood to be less
susceptible to competition from competitors’ brands. Systematically tracking brand loyalties of
its brands over time may provide early warning indicators to GM about downward trends in the
strengths of some of its brands, while tracking switching measures may point to which
competitors appear to be primarily stealing sales away from GM brands.


12
We must acknowledge here that our simulations are susceptible to the Lucas Critique to the extent that our “what
if” scenario may structurally alter the market structure and, therefore, render our model parameters invalid for
prediction purposes (see Frances 2005). We thank an anonymous reviewer for alerting us to this issue.

29
7. Summary and Conclusions
In this paper, we study brand loyalties for durables using automobile survey data from
respondents that are peculiarly censored in the sense of only tracking elapsed times since
transitions, as opposed to the transition times themselves (and this censoring problem is typically
encountered in commercially available survey data for durables). We propose a statistical model
of brand loyalties – a Multi-State, Continuous-Time, Markov model with a parsimonious brand
loyalty structure – that is appropriate for such “last move” data. We also propose a suitable
estimation approach to recover the parameters of our proposed statistical model.
We find that our proposed model accurately reflects the observed outcomes in the data,
doing substantially better than alternative models. The most important modeling innovation of
our proposed model over existing statistical models for last-move data lies in its relaxing the
traditional assumption of a stationary Markov process. Modeling the non-stationarity of the
Markov process is found to both dramatically improve model fit and lead to more plausible
temporal patterns of automobile replacement patterns. Specifically, we find that consumers’
replacement likelihood for automobiles increase over time elapsed since the previous automobile
purchase, instead of remaining time-invariant. We estimate the degree of brand loyalty for the
three big manufacturers in the market, and find that Chrysler is significantly “weaker” than GM
and Ford, in the sense of enjoying the lowest repeat-purchase rates and/or highest switching rates
away from the brand, during the study period. We obtain several interesting findings pertaining
to demographics. Specifically single / higher-income / less-educated consumers are found to be
more brand loyal than married / lower-income / more-educated consumers. We find that this
increase is heterogeneous across different brand-pair combinations. We also find that the
parsimonious brand loyalty structure that we propose – which is inspired by the elegant brand

30
loyalty model of Colombo and Morrison (1989) – as an alternative to the fully unrestricted
transition matrix, only slightly worsens model fit compared to the fully unrestricted model, while
accurately maintaining the key substantive implications obtained from the model. This finding
should be encouraging to marketing practitioners who typically deal with data containing many
brands, where the parsimony afforded by our parsimonious brand loyalty specification can be
computationally much simpler to estimate than the fully unrestricted specification. Last, but not
the least, our model more accurately explains the observed aggregate numbers of transitions than
Colombo and Morrison (1989) despite our model’s simultaneous focus on also explaining
transition times.
One interesting area for future research is the following: Bayus’ (1992) survey data track
the time elapsed between successive purchases of each respondent. Our survey data track the
time elapsed between the most recent purchase of the respondent and the survey date (which is
zero for each respondent in Bayus’ survey data). It would be fruitful to simultaneously
administer both types of surveys to different samples of respondents (i.e., the Bayus-type survey
to new car buyers, and our type of survey to a random sample of actual or potential car buyers) to
see whether the substantive findings about brand loyalties obtained using the two survey datasets
are similar. If the results are different, investigating the reasons for the difference will be
instructive. One reason for the difference could be that the two samples are not “matched,” i.e.,
one group represents current buyers only, while the other does not, which means that there may
be systematic behavioral differences between the groups (which raises the question of which
group is superior for automobile companies to survey in general). Another reason for the
difference – as shown in Bayus, Hong and Labe (1989) – could be that retrospectively
remembering the time of purchase of the previously (as opposed to the currently) owned brand

31
may be more difficult to a respondent at the time of the survey, which leads to a larger number of
survey errors in the first type of survey. In studying these issues, researchers can suitably advise
automobile manufacturers and survey firms about the right types of questions to ask for in
automobile surveys. One can extend our modeling framework to include additional explanatory
variables -- such as dealer characteristics (Verhoef, Langerak and Donkers 2007) – as well as
stated outcomes, such as behavioral loyalty intentions (Mittal, Kumar and Tsiros 1999).

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Retention in the New Car Market: The Moderating Role of Brand Tier”, Journal of
Retailing, 83, 1, 97-113.

Vilcassim, N. J. and D. C. Jain (1991), “Modeling Purchase Timing and Brand Switching
Behavior Incorporating Explanatory Variables and Unobserved Heterogeneity”, Journal
of Marketing Research, 28, 1, 29-41.

Wedel, M., W. Kamakura, W. S. Desarbo and F. T. Hofstede (1995), “Implications for
Asymmetry, Nonproportionality, and Heterogeneity in Brand Switching from Piecewise
Exponential Mixture Hazard Models”, Journal of Marketing Research, 32, 4, 457-462.




FIGURE 1: ESTIMATED TRANSITION HAZARDS ASSOCIATED WITH
SWITCHING AWAY FROM GM (i=GM → →→ → j)
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
1 2 3 4 5 6 7 8 9 10 11 12
Months After Survey
M
a
r
k
e
t

S
h
a
r
e
s
Ford
GM
Chrysler

FIGURE 2: PREDICTED FUTURE MARKET SHARES OF GM, FORD AND
CHRYSLER

34
TABLE 1
Observed Brand Switching Matrix
(Row = previously owned brand, Column = currently owned brand)


GM Ford Chrysler Other Total
GM 258
(0.61)
43
(0.10)
22
(0.05)
103
(0.24)
426
Ford 13
(0.10)
85
(0.63)
13
(0.10)
23
(0.17)
134
Chrysler 22
(0.27)
13
(0.16)
29
(0.35)
19
(0.23)
83
Other 42
(0.19)
19
(0.08)
15
(0.07)
151
(0.67)
229
Total
335 160 79 296 870
* Numbers within parentheses represent transition probabilities.

35

TABLE 2
Descriptive Statistics
(Number of respondents in sample: 870)










TABLE 3
Fit Statistics
AIC = -2*LL + 2 (# parameters)
SBC = -2*LL + [ln (# households)] * [# parameters]
Number of households = 870
Mean Std Dev Max Min
Elapsed Time (months) 7.26 4.08 57 0
Marital Status
(1 = Single, 2 = Married)
1.69 * * *
Income ($) 45,181 24,747 110,000 2,500
Education (years) 14.74 2.96 22 8
Satisfaction 5.37 1.74 7 1
LL AIC SBC
#
param.
Full Model -2791.65 5613.72 5704.32 19
Stationary Version -3520.97 7067.94 7129.93 13
Stationary Version w/o Covariates -3546.11 7110.12 7153.14 9
Stationary Version w/o Covariates & Loyalty Structure -3507.60 7047.2 7123.50 16

36
TABLE 4
Results from the Stationary Version and Full Version of Our Proposed Model
a: Stationary models assume baseline hazard to be exponential rather than log-logistic;
b: Standard errors within parentheses. All estimates are significant at the 0.05 level except for
marital status in the stationary model.

Stationary Version of
Proposed Model without
Demographics
a
Stationary Version
of Proposed Model
a
Full Version of
Proposed Model
Parameters Estimates
b
Estimates
b
Estimates
b
GM
0.50
(0.08)
0.38
(0.05)
0.76
(0.02)
Ford
0.76
(0.04)
0.63
(0.07)
0.85
(0.02)
Chrysler
0.54
(0.08)
0.34
(0.09)
0.71
(0.04)
Brand Loyalties
(
i
α )
Other
0.75
(0.05)
0.50
(0.13)
0.83
(0.02)
Marital
Status

-0.03
(0.05)
-0.06
(0.02)
Income
0.01
(0.00)
0.01
(0.00)
Demographic Effects
(
D
β )
Education
-0.01
(0.00)
-0.01
(0.00)
Attitudinal Effect
(
A
β )
Satisfaction
0.11
(0.01)
0.03
(0.01)
GM
0.08
(0.01)
0.05
(0.01)
0.13
(0.00)
Ford
0.04
(0.01)
0.02
(0.00)
0.12
(0.00)
Chrysler
0.03
(0.01)
0.02
(0.00)
0.11
(0.00)
Baseline Hazard Rates –
Shape Parameters
(
j
γ )
Other
0.07
(0.01)
0.05
(0.00)
0.13
(0.00)
GM n/a n/a
6.86
(0.34)
Ford n/a n/a
5.73
(0.39)
Chrysler n/a n/a
4.68
(0.53)
Baseline Hazard Rates –
Scale Parameters
(
j
λ )
Other n/a n/a
7.47
(0.40)
Increase in Hazard Rate
due to Loyalty ( δ )

0.03
(0.01)
0.04
(0.01)
0.02
(0.00)
Effect of modal
replacement time (τ )

0.05
(0.00)
Error standard deviation
(σ )

0.04
(0.01)
Number of Households 870 870 870
Number of Households 9 13 19
Log-likelihood Value -3546.11 -3520.97 -2791.65
AIC 7110.22 7067.94 5613.72
SBC 7153.14 7129.93 5704.32

37
TABLE 5
Transition Rates Implied by our Proposed Model













* Numbers within parentheses represent the transition rates implied by the stationary version of our
proposed model without covariates and without the parsimonious brand loyalty structure.


TABLE 6
Results from the Colombo and Morrison (1989) Model



Parameters Estimates*
GM
0.42
(0.04)
Ford
0.54
(0.05)
Chrysler
0.26
(0.06)
Brand Loyalties
(
i
α )
Other
0.44
(0.06)
GM
0.31
(0.05)
Ford
0.18
(0.07)
Chrysler
0.12
(0.06)
Zero-order Brand Choice Probabilities
(
i
µ )
Other 0.39
*Standard errors within parentheses. All estimates are significant at the 0.05 level.

Number of Observations = 16, Number of Parameters = 7
LL = - 943.88, AIC = 1901.76, BIC = 1907.17
GM Ford Chrysler Other
GM
0.10
(0.10)
0.02
(0.02)
0.01
(0.01)
0.03
(0.04)
Ford
0.02
(0.01)
0.06
(0.07)
0.01
(0.01)
0.02
(0.02)
Chrysler
0.04
(0.04)
0.02
(0.02)
0.04
(0.05)
0.03
(0.03)
Other
0.02
(0.02)
0.01
(0.01)
0.01
(0.01)
0.09
(0.07)

38
TABLE 7
Estimated Transition Probabilities under Our Model versus
Colombo and Morrison (1989) Model (within parentheses)















GM Ford Chrysler Others
GM
0.60
(0.60)
0.10
(0.10)
0.05
(0.07)
0.24
(0.23)
Ford
0.10
(0.14)
0.63
(0.62)
0.10
(0.05)
0.17
(0.18)
Chrysler
0.26
(0.23)
0.16
(0.13)
0.35
(0.34)
0.23
(0.29)
Others
0.18
(0.17)
0.08
(0.10)
0.07
(0.07)
0.67
(0.66)

“Speed of Replacement”: Modeling Brand Loyalty Using Last-Move Data

Abstract We study brand loyalties for durable goods using automobile survey data that are peculiarly censored in the sense of only tracking elapsed times since transitions, and not the transition times themselves. This censoring problem is typical of durable goods survey data that are commercially available from survey research firms. However, there has been little to no attention paid to such “last move” data in the statistics literature, far less the marketing literature on the analysis of transition times. For this purpose, we propose a Multi-State, Continuous-Time, Markov model with a parsimonious brand loyalty structure. We then propose a suitable estimation approach to recover the parameters of our proposed statistical model using the automobile survey data. We obtain several interesting substantive findings using our proposed empirical procedure. A few key findings are the following: (1) Chrysler is significantly “weaker” than GM and Ford, in the sense of enjoying the lowest brand loyalty during the study period, (2) Male / Single / Older / Higher-income / Less-educated consumers are more brand loyal than Female / Married / Younger / Lower-income / More-educated consumers, (3) Our proposed non-stationary model – with its parsimonious brand loyalty structure -- fits even better than a fully un-restricted (and, therefore, highly parameterized) transition structure, under the traditional stationarity assumption, for brand choice outcomes. We illustrate the managerial implications of our proposed model by predicting time-varying market shares of brands in periods subsequent to the period of analysis. Keywords: Brand Loyalty, Last Move Data, Durable Goods, Automobiles, Transition Times, Transition Hazards, Competing Risks Models, Continuous-Time Markov Processes, NonStationary Markov Processes.

“Speed of Replacement”: Modeling Brand Loyalty Using Last-Move Data 1. Introduction
Companies employ loyalty-based management to increase the profitability of their enterprises by managing customer churn. Several company case studies over the past decade have shown that small improvements in customer retention can substantially improve company profits (see, for example, Reichheld 1996). Understanding and managing brand loyalty is especially critical in durable goods industries (such as the automobile industry), where products on the one hand involve large profit margins, but on the other hand involve long replacement cycles for buyers. The latter issue (i.e., long replacement cycles) makes it challenging for automobile manufacturers to ensure that consumers repeat-purchase within the same company franchise when it is time for a customer to replace their automobile. In order to stimulate repeatpurchasing behavior for their brands, automobile manufacturers must first obtain an accurate description of consumers’ brand loyalties for existing brands using readily available (typically, survey) data. We address this issue in this paper. We present an empirical approach to estimate brand loyalties of automobile brands using “last move data,” i.e., retrospective event history data (tracked using a survey administered at a fixed point of time, such as the J.D. Power Automotive Survey), in which the available information for each respondent are (1) the currently owned automobile brand (say, brand j) at the time of the survey, (2) the previously owned automobile brand (say, brand i), and (3) the time at which the i → j transition occurred. In doing this, we make a methodological contribution to the literature on hazard models of event times.

1

Using our proposed approach, we estimate the brand loyalty associated with each automobile brand, that takes into account both (1) the extent of repeat-purchasing behavior (i.e., the share of consumers in the market who repeat-purchase the brand), as well as the (2) the speed of replacement (i.e., elapsed time until a consumer’s repeat-purchase of the brand). Existing empirical approaches in the brand loyalty literature pertaining to durable goods only account for (1), but not for (2) (as will be explained in the next section).2 However, if Ford cars are repeatpurchased sooner than GM cars in the data, it may be indicative of stronger brand loyalty for Ford in the marketplace beyond what is accounted for by simply counting the number of repeat purchases of Ford cars in the data. Our approach explicitly accounts for such “speed of replacement” effects in the estimation of brand loyalty. Our proposed econometric model represents a Multi-state, Continuous-Time, Markov process whose parameters are non-stationary over time. We incorporate a parsimonious structure of brand loyalties within this model, that reduces the number of estimable parameters substantially compared to a model with a fully unrestricted transition rate matrix, and then compare the empirical performance of the parsimonious specification versus that of the unrestricted specification. The rest of the paper is organized as follows. In section 2, we position our paper relative to the existing literature on brand loyalty and inter-purchase times. Section 3 presents the model. Section 4 discusses the last move data, as well as our proposed estimation technique. Estimation results are presented and discussed in section 5. We discuss managerial implications in Section 6, while Section 7 concludes with a summary and directions for future research.

2

The aggregate number of transitions for a brand-pair in the market is, in general, not a sufficient statistic for the distribution of inter-purchase times associated with the brand-pair.

2

Power survey data collected from 30. An approach similar to that of Colombo and Morrison (1989) is used by McCarthy. However. They illustrate the application of their “mover-stayer” approach using survey data from 20.2. the authors (successfully) urge marketing researchers to collect the type of survey data that is necessary to estimate their model. among all possible brand pairs.000 3 . over a fixed time interval – is that of Colombo and Morrison (1989). it is possible that Ford’s brand loyalty is stronger than that of GM even if GM currently has more buyers than Ford. Literature Review 2.000 new car buyers in 1963. Such effects cannot be captured in the Colombo and Morrison (1989) approach.D. Mittal and Kamakura (2001) use a binary probit model to investigate brand loyalties of the customers of an automobile firm. the proposed approach of using the transition matrix to estimate brand loyalties is appropriate and meaningful. Suppose Ford buyers replace their cars faster than GM buyers.1 Empirical Models of Brand Loyalties for Durable Goods An influential paper on the estimation of brand loyalties for brands of durable goods using the aggregate transition matrix – which tracks the number of consumers who make the transition from a given brand to another brand (including itself). Since the dataset used by the authors does not track the elapsed time between successive automobile purchases of a given buyer. Kannan. In addition to providing elegant and parsimonious market-based measures of brand loyalties. in terms of whether or not they repeat-purchase from the same firm for their next automobile purchase. the Colombo and Morrison (1989) approach ignores the effects of consumers’ inter-purchase times. Chandrasekharan and Wright (1992) to estimate brand loyalties using J.142 new car buyers in 1985. Bayus (1992) applies the mover-stayer approach of Colombo and Morrison (1989) to estimate brand loyalties in four different durable goods categories using survey data from 50.

we do not observe the elapsed time between a household’s successive purchases in the category. The author then estimates the Colombo and Morrison (1989) model separately for the three groups. for the first time in the marketing literature. Kamakura. This information is used to separate buyers within a category into 3 groups: early replacers. Unlike Colombo and Morrison (1989). Instead. as is typical of durable goods survey data. The author finds a relationship between replacement times and brand loyalties in that late replacers are more likely to be brand loyal than early replacers. More importantly. Seetharaman 4 . Gonul and Srinivasan 1993. 2. it does not explicitly extend the modeling framework to handle inter-purchase times as endogenous outcomes of the model. called last move data. This yields data. and late replacers (using appropriate cutoffs in the empirical distribution of inter-purchase times estimated using the data). These are (1) the “competing risks” model (Vilcassim and Jain 1991. Wedel. Bayus (1992) additionally observes the time elapsed between successive purchases of a household within each category. how to estimate brand loyalties using last move data. Our approach illustrates. While Bayus’ (1992) approach accounts for the effects of inter-purchase times within the Colombo and Morrison (1989) framework. Desarbo and Hofstede 1995. average replacers. unlike Bayus (1992).households that bought one or more of the mentioned categories in 1985.2 Empirical Models of Inter-Purchase Times and Brand Choices Two approaches have been previously used to simultaneously model inter-purchase times and brand choices of households. which are typical of survey data that are tracked by marketing research firms to study durable goods purchases. as we do in this paper. we observe the elapsed time between the household’s most recent purchase in the category and the time of the survey (both of which are identical in Bayus’ study since the survey is administered only to current buyers of the product).

Non-Stationary Markov Model (discussed in the next section) of respondents’ brand-pair transitions. Therefore. In this paper. In the second approach. we propose an empirical approach that is inspired by a recent paper by Schmertmann (1999). This is a clever proposal to deal with last move data. non-durable product categories – are inapplicable in our durable goods case for two reasons: (1) we do not observe completed inter-purchase times of households. or logit functions of brand choices.and not brand-specific). using these previously proposed estimation approaches on our data. Continuous-Time.. Schmertmann (1999) shows how to estimate transition rates among alternatives using last move data. or exponential). we propose a Multi-State. In this paper.and Chintagunta 2003). as outcomes in the model. the authors use competing hazard functions for all possible brandpair transitions that are observed in the data. the authors use a hazard function for inter-purchase times (that are category.e. is used to predict the aggregate numbers of transitions in the data. Both approaches – that are illustrated using consumer buying data in frequently purchased. Continuous-Time. In the first approach. as well as (2) the time elapsed between the origin and destination states of each transition. and (2) we do not observe a (small-sized) consideration set for brand choices at the household-level (which makes the second approach infeasible). Stationary Markov process characterizing consumers’ transitions among alternatives. coupled with a numerical approximation procedure. brand choices) of a transition. it is impossible to estimate either hazard functions of inter-purchase times. This approach is based on a Multi-State. which treats both (1) the origin and destination states (i. and (2) the “Dynamic McFadden” model of Chintagunta and Prasad (1998). and a conditional logit model for brand choices. The stationarity assumption (which makes the transition hazard rates time-invariant. Given the data idiosyncrasies associated with our empirical context (as explained above). 5 .

Our statistical model is more flexible than that of Schmertmann (1999) in that we use a non-stationary Markov process (which can allow for arbitrary shapes of hazard functions characterizing transitions) to characterize the observed transitions among brands. while it is difficult. we are able to investigate whether household-specific demographics such as age. The survey collects information on the most recent choice of automobile brand – in terms of both which brand was purchased and when it was purchased – by 6 . transitions). 3.1. while Schmertmann’s (1999) approach relies on numerically approximated moment conditions for the aggregate numbers of transitions that are observed at the market-level. would restrict these replacement probabilities to be time-invariant (and. as opposed to household-level. in fact. our estimation approach employs exact likelihood functions for the disaggregate transition choices that are observed at the household-level. which is of enormous practical interest to marketing practitioners. we employ an estimation approach (explained in section 4) that addresses this issue. This makes it easy to accommodate the effects of respondent-specific demographic variables in our approach.Since the elapsed times between transitions are not actually observed in last move data. In other words. if not impossible. to do so in Schmertmann’s (1999) approach (since it relies on aggregate. Also. Notation A survey is taken at time T . income etc. this restriction is central to the workability of his estimation procedure). influence households’ brand loyalties. Schmertmann’s (1999) model. Model 3. on the other hand. This is an important modeling innovation since one would intuitively expect consumers’ replacement probabilities for their currently held automobiles to increase since time elapsed since their previous purchase of an automobile.

satisfaction).g. Non-Stationary Markov process. t ≥ 0) denote the hazard functions associated with the transitions. education. The survey also records the brand that was previously owned by the respondent before buying brand j . and the time elapsed since its purchase (also called “backward recurrence time”) u . is assumed to evolve according to a Multi-State. Continuous-Time. j = 1. We denote this brand j (which is one of J available brands of automobiles). µ J −1. We denote this vector X . µ11 (t ) µ22 (t ) µ1J (t ) . J −1 (t ) µ J 1 (t ) µ JJ (t ) 7 . as shown below.2. 3. This Markov process is represented by a J × J transition matrix µ . whose elements µij ( t ) (i. Let Fij ( t ) and fij ( t ) denote the cumulative distribution function (CDF) and probability density function (PDF) characterizing the i → j transitions (which are not actually observed in the data..) and attitudes (e. Proposed Multi-State.. conditional on the elapsed time ( t ) since the household’s purchase of brand i ..the respondent prior to the survey date T . as will be explained in the estimation section later). The survey collects information on respondent demographics (income. marital status etc.. Non-Stationary Markov Model A household’s instantaneous probability (or hazard function) of making a transition from brand i to brand j . J . but must be estimated using last moves only. Continuous-Time.. We denote this brand i (which is also one of the J available brands of automobiles).

can be re-written as shown below. (1) where Sij ( t ) = 1 − Fij (t ) denotes the survivor function associated with the i → j transition. it is useful to note that the diagonal elements represent the case of the household repeat-buying the currently held brand. which. our model (represented by equation (3)) can be understood as follows: A household that currently owns automobile brand i at time t can continue to hold on to its currently held brand. and µi 0 ( t ) represents this option. fij ( t ) = µij ( t ) Sij ( t ) . as represented by the appropriate row of the transition matrix given above) is given by the negative of the sum of all the hazards within a given row. log-normal. in turn. not replacing the currently held automobile. It is also useful to note that the hazard function associated with a household staying in the current state (i. Therefore. Equation (1) can be re-written as follows.. one can allow µij ( t ) to follow a suitably chosen parametric distribution. The hazard function associated with the i → j transition can be written as follows. For example. log-logistic. For example. such as exponential. µi 0 (t ) = − J j =1 µij (t ) denotes the hazard function associated with not replacing brand i .In the above-mentioned matrix. µij ( t ) = 1 − Fij ( t ) fij ( t ) = Sij ( t ) f ij ( t ) . the diagonal elements represent brand loyalties of households. a household that currently owns a Ford automobile can replace it with another Ford automobile. expo-power etc. the household can choose to replace 8 .e. erlang-2. To summarize. fij ( t ) = µij ( t ) exp − t J (2) 0 j =1 µij ( w ) dw (3) In this model specification. weibull. On the other hand.

and µij ( t ) ( j = 1. In our application. as follows.e.. With probability α i .its currently held automobile. and has been used by Schmertmann (1999). where k ≠ i .. the diagonal elements represent the option of repeat-buying the same brand. µii ( t ) = α i ( hi ( t ) + δ ) + (1 − α i ) hi ( t ) . µik ( t ) = (1 − α i ) hk ( t ) . hi ( t ) is the baseline hazard function characterizing the purchase of brand i . and δ > 0 represents the increase in the baseline hazard function for brand i that results because of brand loyalty..1] represents the household’s probability of being brand loyal towards brand i . µik ( t ) is the hazard function characterizing a transition from brand i to brand k . while µi 0 ( t ) represent the options of continuing in the current state (i. we specify the household’s transition-specific hazard functions. This special case restricts transition times to follow an exponential (“memoryless”) distribution. µij ( t ) = µij ∀t ... continuing to hold the current car). (4) where µii ( t ) is the hazard function characterizing repeat-purchase of brand i . Equation (4) can be understood as follows: Suppose a household is choosing to replace its currently held automobile – brand i – at time t . in which case it faces J replacement possibilities. If the Markov process is stationary. Since our interest in this study is in estimating brand loyalties of brands. α i ∈ [0. i.e. This simplifies equation (3) to fij ( t ) = µij exp −t J j =1 µij . however. then the transition-specific hazard functions are timeinvariant. this household will be in a 9 . In text-book discussions of the continuous-time Markov model. J ) represent these options. µij ( t ) . the diagonal elements of the transition matrix typically represent the option of continuing in the current state..

this difference is significant (for example. using the stationary version of our proposed model (that involves time-invariant transition-specific hazard functions). In that case. and δ ).brand loyal state towards brand i . 10 . the household’s conditional hazard function for switching to brand k will be higher (and equal to hk ( t ) ) if the household is in a switching state than if the household is in a brand loyal state (when it will equal 0 ).e. Givon 1984). the parsimonious specification involves only 21 parameters. in contrast to the fully parameterized specification involving 100 parameters!). captures the spirit of Colombo and Morrison’s (1989) elegant mover-stayer model of brand loyalty.. J 2 different µ jk ' ). therefore.e. Similarly. J different α i ' . and with probability 1 − α i . For large values of J . say. involve more parameters). with s J = 10 . J different hk ' . equation (4) involves only 2 J + 1 estimable parameters (i. Similar specifications have also been widely used to model brand loyalties for packaged goods brands within discrete choice models (see. for example. the computational simplicity of the parsimonious specification over the fully unrestricted specification will be even more remarkable. while equation (3) involves J 2 estimable parameters s s (i. as represented in equation (3). The modeling parsimony of the specification embodied in equation (4) over the fully parameterized specification embodied in equation (3) can be appreciated. This modeling extension that equation (4) overlays on the generic version of our proposed model. Under the more general version of our proposed model (that allows transition-specific hazard functions to be non-stationary and.. The household’s conditional hazard function for repeatpurchasing brand i will be higher (and equal to hi ( t ) + δ ) if the household is in a brand loyal state than if the household is in a switching state (when it will equal hi ( t ) ). this household will be in a switching state away from brand i .

e. as shown below. 3 11 . i. X is an Mdimensional row vector of covariates pertaining to the household. This completes our exposition of our proposed model. we allow the brand loyalty parameters of the household to be linear functions of the household-specific covariates (i. and β denotes the corresponding column-vector of parameters (which captures the effects of demographics and satisfaction on brand loyalty).Next. to follow a log-logistic distribution.e. as shown below.3 Since the log-logistic distribution involves two parameters. (5) (γ j . This introduces M additional estimable parameters. hj (t ) = γ j λ j (γ j t ) 1 + (γ j t ) λ j −1 λj . α i = α 0i + X β . h j ( t ) . λ j > 0) This renders the Markov process to be non-stationary. we empirically verified that the log-logistic distribution was superior to the Erlang-2 distribution in terms of explaining our data. demographic characteristics... but not least. this introduces J additional estimable parameters (one for each brand). The reason for this choice of baseline hazard function is that Chintagunta and Haldar (1998) and Chintagunta and Prasad (1999) show this distribution to outperform alternative distributions using durable goods replacement data. In our case. We discuss our proposed estimation approach – that handles the peculiar censoring that is associated with last move data Seetharaman and Chintagunta (2003) demonstrate the empirical superiority of the log-logistic distribution to other distributions using purchase timing data on packaged goods. (6) where α 0i refers to the base level of brand loyalty associated with brand i. we specify the baseline hazard function characterizing the household’s purchase of brand j . Last. and satisfaction scores for the currently owned brand).

In addition.1. For each respondent. Data Data used in this study was collected using a mail survey in February 19904. We can test whether such findings obtain for automobile purchases using our dataset. and (3) the brand name of the previously owned automobile of the respondent. Data and Estimation 4. age. education etc. General Motors (GM. In addition. as well as satisfaction scores for their previously owned brands (on an ordinal scale with categories 1-7).). Ford 4 The collectors and owners of the data are Myung-Soo Lee (Baruch) and Brian Ratchford (UT-Dallas). (2) the respondent’s date of purchase of this currently owned automobile. Mittal and Kamakura (2001) and Lambert-Pandraud. Laurent and Lapersonne (2005) find that older buyers are more brand loyal than younger buyers. marital status.e. We thank them for their generosity in sharing their data with us. we can also test the implications of the other available demographics in our dataset on brand loyalty. we observe demographic characteristics of the survey respondents (gender. Lee and Talukdar (2003) for a complete description of the data). while the transition time associated with the observed i → j transition is unobserved – in the next section.. The dataset contains 901 respondents. henceforth). We aggregate brand names to the level of the manufacturer and confine our attention to estimating brand loyalties for manufacturer names. income. i. 4.because only the elapsed time u is observed. we know (1) the brand name of the automobile that is currently owned by the respondent. Eliminating surveys with missing information leaves us with 870 respondents for our analysis (see Ratchford. 12 . after we describe the data. These three variables are used to construct the outcome variables associated with our proposed statistical model.

Our proposed model is designed to address this issue.5 Table 1 reports the brand switching matrix associated with these brand names (Note: This brand switching matrix is the necessary input for the Colombo and Morrison (1989) approach of estimating brand loyalties). the value associated with the Chrysler → GM switch (0. j = 1. 13 . Also. [Insert Table 1 here] While Table 1 reveals the aggregate transition patterns in the data. From this table.. In traditional purchase timing 5 This is done for two reasons: (1) expositional convenience. 4. which implies that Chrysler is more vulnerable to GM’s competitive threat than it is to Ford’s competitive threat.60) and Ford (0.and Chrysler (which are the three largest share firms represented in our survey data... This suggests that Chrysler may have the lowest brand loyalty among the “Big Three” US manufacturers during the study period. Estimation The estimation problem pertains to our ability to estimate the transition hazards – µij ( t ) (i. it does not reveal the patterns of inter-purchase times associated with the various brand-pair transitions..62). the remaining brands/manufacturers are collapsed in to a composite brand called “Other”). we discuss how to estimate our proposed model on the dataset. such as commercial datasets available from marketing research firms.16). it is clear that GM is the largest among the three brands.2. and (2) small sample size. In practice. t ≥ 0) – using the available last move data. it is straightforward to extend our proposed approach to investigate brand loyalties at the level of make/model combinations using datasets with larger numbers of respondents.27) is much higher than that associated with the Chrysler → Ford switch (0. Next. the transition probability associated with repeat-purchase is the lowest for Chrysler (0. J .35) and is much higher for both GM (0. Among the transition probabilities associated with brand switching away from Chrysler.

We next discuss how to deal with estimation in this setting. We treat each household h’s contribution to the sample likelihood function as arising from two sources. The contribution of the first source is simply the hazard function associated with the transition..datasets – such as scanner panel data – completed purchase spells of households are observed. µih jh (th ) . the estimation strategy involves the computation of the probability density function associated with each inter-purchase spell of a household. S jh * = exp − 0 k =1 µ j k ( t ) dt . jh where ih is the brand being switched from. Therefore.. for each household.e. brand choices) associated with the transition. until the period of survey. h (7) th stands for the where H stands for the total number of households in the sample. We employ the likelihood approach to estimation. i.e. however. We observe only the time elapsed since the most recent transition (i. which represents the probability that all possible transitions from h state jh are “survived” by the household over the time interval uh .. completed interpurchase spells are not observed. i. In our case. the sample likelihood function can be written as follows. a “right-censored” incomplete spell). L = ∏ µih jh ( th ) exp − h =1 H uh J 0 k =1 µ j k ( t ) dt . The contribution of the second source is the survivor function uh J associated with the elapsed time since the transition. one being the transition – represented by a particular brand pair ih .e. uh . (unobserved) inter-purchase time between household h ’s purchases of brands ih and jh . and jh is the brand being switched to – and the other being the time elapsed since the transition. and uh 14 .. In other words. as well as the origin and destination states (i.e.

Therefore. this is the estimation strategy employed by Schmertmann (1999). as latent variables and then maximize the appropriate sample likelihood function – given in 15 .e. th .. as well as investigate the effects of household variables on brand loyalties (by allowing µij (t ) to depend on X . and must be used directly for estimation purposes. the above-mentioned likelihood function reduces to the following. and then uses a method-of-moments estimator to minimize the distance between these expected numbers and their observed counterparts. In the stationary Markov process case (i. are observed. appear in the sample likelihood function! The above-mentioned sample likelihood function can be straightforwardly maximized using gradient-based techniques to obtain consistent estimates of all model parameters. We discuss how to estimate our model next. as shown in equations (4) and (5)).stands for the (observed) elapsed time since household h ’s most recent transition. Only elapsed times. In the non-stationary Markov process case. Our interest in this study is to both allow for non-stationarity in the Markov process. however. uh . However. th . when µij ( t ) does not depend on t ). such an estimator cannot incorporate the effects of household variables in the estimation since the estimation equation relies on aggregate transitions. The problem with using equation (7) directly. are not observed in last move data. in the stationary Markov process case. In fact. we must treat unobserved inter-purchase times. th . equation (7) does not reduce to equation (8). the econometrician bears no consequences of not observing household-specific inter-purchase times. h (8) In other words. L = ∏ µih jh exp −uh h =1 H J k =1 µ j k dt . except that he proposes a numerical approximation for the expected number of aggregate transitions for each of the transitions in the data. since only the elapsed times. uh . is that household-specific inter-purchase times.

We find that our approach significantly improves upon his approach.equation (7) – that results from a suitable specification of the latent variables. uh . where the exponential hazard assumption is invoked to make the endogenous initial conditions problem “go away. and is given by the following formula. Treating the unobserved inter-purchase times as latent variables in our model is reminiscent of the problem of treating unobserved lagged choices prior to the sample period as latent variables in discrete choice models. characterizing the ih → jh transition that is observed for household h. We use the following latent variable specification for unobserved values of th in the data:6 th = uh + τ ti*h jh + ε h . that would be an empirical testament to the superiority of the nonstationary Markov process over the stationary Markov process implied by equation (8). (10) h The intuition for using this latent variable specification is that the (observed) elapsed time since the most recent purchase of the household until the period of the survey. and ti*h jh is the mode associated with the log-logistic transition density. σ 2 ) is an error term that is assumed to be iid across households. (9) where τ ≥ 0 is an estimable parameter. also called the “endogenous initial conditions problem” for state dependence models (Honore and Kyriazidou 2000). If the maximized value of the resulting sample likelihood function turns out to be higher than that obtained from maximizing equation (8). µih jh . our approach generalizes the stationary Markov process approach of Schmertmann (1999). must be informative 6 It is important to note that in using this latent variable specification. This is the estimation strategy that we undertake in this study.” One of the estimable versions of our proposed model indeed allows for Schmertmann’s “memoryless” exponential hazards to test the reasonableness of his approach on our data. ti*h jh = λ j −1 λj +1 h h 1/ λ jh γj . ε h ~ N (0. 16 .

relative to the other. σ 2 ) ) for household h is (the derivation is available in a web-based appendix) Lh = α ih h jh ( th ) + δ I ( ih = jh ) + 1 − α ih h jh ( th ) * exp − J k =1 uh 0 ( ) ( ) α j ( hk ( t ) + δ ) I ( jh = k ) + (1 − α j ) hk ( t ) dt . between the household’s purchases of brand ih and jh in the sense that the larger the observed value of uh . Therefore. the mode of the log-logistic transition density characterizing the ih → jh transition is the most likely value of the inter-purchase time characterizing the i → j transition. th . I ( jh = k ) is an indicator function that take the value 1 when jh = k . the larger one would expect the unobserved value of th to be. and 0 otherwise. The sample likelihood function is then obtained by taking the product of these unconditional household likelihood functions over 17 . one would expect the unobserved value of th to be “close” to this modal value. the conditional household likelihood function (given a random draw ε h of ε h from N (0. Given this latent variable ˆ specification. The unconditional household likelihood function is obtained by averaging the conditional likelihood ˆ functions (yielded by equation (11)) over all draws ε h of ε h . h h (11) where I (ih = jh ) is an indicator function that take the value 1 when ih = jh . and 0 otherwise.about the (unobserved) inter-purchase time. Moreover. We use τ to capture the relative weight that one can give one proxy. in imputing the unobserved values of th . λk > 0) under the log-logistic specification for the transition-specific hazard functions. th is the ˆ value of th (yielded by equation (9)) that corresponds to the random draw ε h of ε h and hk ( t ) = γ k λk ( γ k t ) 1 + (γ k t ) λk −1 λk . (12) (γ k .

Stationary version (i. Full Model (includes both log-logistic hazards and demographic effects).e.96 years). Stationary version without demographic effects. Next we discuss the empirical results.74). hazards).747). 69% of the respondents are married. exponential. In terms of marital status. instead of log-logistic. 18 .74 years (with a standard deviation of 2. 5.37 (with a standard deviation of 1. Comparing the performance of versions 2 and 3 will let us understand the importance of demographic effects in explaining households’ brand loyalties. Stationary version without demographic effects and loyalty structure (equation (4)). while the average income is $45. 3. [Insert Table 2 here] We estimate the following four versions of our proposed model of brand loyalties.all households in the sample. and descriptive statistics pertaining to the sample are reported in Table 2. and the standard deviation of the elapsed time is 4. 1.. The average satisfaction score across respondents is 5. Comparing the empirical performance of versions 1 and 2 will let us understand the importance of modeling non-stationarity in the Markov process. The average education across respondents is 14.7 This completes our exposition of our proposed estimation approach.26 months. Empirical Results There are 870 survey respondents in the sample. 2.08 months. while 31% are single. Comparing versions 3 and 4 will let us understand the consequences of adopting 7 Estimation is carried out in the C++ programming language.181 (with a standard deviation of $24. We can see that the average elapsed time since the most recent automobile purchase is 7. 4. which is maximized using gradient-based techniques to obtain maximum likelihood estimates of model parameters.

For example. This shows that demographic effects have only a modest (albeit statistically 8 We also estimated an Erlang-2 baseline hazard function (which also allows for a non-stationary Markov process) and obtained LL. AIC and SBC. Detailed results are available from the authors.59% and 0. One reason for the departure could be that since our dataset involves only a single observation at the respondent level (unlike packaged goods datasets that involve several repeat purchases at the household level). Model version 4 can be understood to be a maximumlikelihood counterpart to the method-of-moments approach taken by Schmertmann (1999). 7.8 Additionally.26%.3% and 19.32%.a parsimonious representation of brand loyalty. 6554. the Multi-State. AIC. for example. respectively. Akaike Information Criterion (AIC) and Schwarz Bayesian Criterion (SBC) – for each of the 4 versions of our proposed model mentioned above. we report three fit statistics – Log-Likelihood (LL). and 7. and SBC of -3263. we find in Table 3 that the stationary version has fit improvements of 0.13% over the stationary model. Next.does not improve model fit. respectively. we find that allowing the parameters of the full model to be heterogeneous across respondents – according to a random effects distribution -. Interestingly.80 and 6621. 19 . we observe that the full model convincingly outperforms the remaining models. 0.71%. Seetharaman and Chintagunta 2003). over the next best fitting model. In terms of all three fit statistics. Continuous-Time Markov process is non-stationary over time. Said differently.40.4%. this finding departs from findings in packaged goods categories that there is significant heterogeneity in hazard function parameters across households (see. This shows that the log-logistic hazard substantially improves our ability to explain the observed transitions and elapsed times compared to an exponential hazard.32%. instead of estimating a fully unrestricted transition rate matrix.56. the full model has fit improvements of 20. These represent fit improvements of 7. it does not contain sufficient information to reliably estimate heterogeneity across respondents. In Table 3. AIC and SBC. over the stationary version without demographics. 20. in terms of LL. respectively in terms of LL.9%. as given by equation (4).

by 1.71).e.10%. AIC and SBC. may seem to justify the estimation of a fully unrestricted transition rate matrix. a statistical specification that explicitly models brand loyalties (such as our parsimonious representation of brand loyalties) sheds substantive light on the existing levels of loyalty for various brands in the market. While this finding. conditional on being in a brand-loyal state. after adjusting for the decreased number of parameters. Among the “Big 3” US brands.significant) degree of explanatory power. we would argue that our parsimonious representation of brand loyalty should be preferred despite the associated decrease in model fit simply because the decrease is quite modest from using the parsimonious representation. The estimated value of the increase in the hazard rate of buying a brand. respectively in terms of LL. than the unrestricted representation.85).89% and 0.42%. with much larger number of brands. as mentioned earlier. as expected. which is of enormous practical interest to marketing practitioners. we find that our imposed loyalty structure slightly worsens the fit of the model. The results for the full version are presented in the fourth column of Table 4. it is possible that the parsimonious representation may actually fit better. is positive (0. in Table 4. This implies that a household in a brand-loyal state will show an increased tendency to repeat-purchase the currently owned brand. In fact. More importantly. with GM being second highest (0.02). Lastly. 0. [Insert Table 3 here] We present the estimation results for three versions of our proposed model. i. in explaining the estimated brand loyalties in the data. at the face of it. and Chrysler being the lowest (0..76). [Insert Table 4] 20 . Ford is found to enjoy the highest degree of brand loyalty (0. at least relative to the log-logistic specification of the transition hazards.

i → i ). they are more likely than lowerincome to repeat-purchase the same brand to maintain their “social status quo. [Insert Figure 1] We find that the hazard functions are all monotonically increasing. We report the plots corresponding to i = GM in Figure 1. typically estimated effects of demographics on brand loyalty are found to be insignificant for non-durable goods. We can rationalize findings (2) and (3) as follows: To the extent that higher-income consumers are more likely to buy more expensive automobiles (such as Cadillac) for prestige reasons. In terms of the switching transition 9 In contrast to our findings about demographic effects on brand loyalty for durable goods such as automobiles.e... In terms of the repeat-purchase transition hazards (i. and agrees with the findings in Mittal and Kamakura (2001). In order to interpret the estimated log-logistic hazard parameters. which makes them more likely than less-educated consumers to switch to a different brand if a new brand is perceived to be the “coolest new car” regardless of whether it is made by the same manufacturer of their currently owned car. We estimate a positive effect of customer satisfaction on brand loyalty. we observe several interesting effects pertaining to demographic effects on brand loyalty. which makes intuitive sense for durable goods such as automobile brands. we find that both the GM → GM and Ford → Ford transition hazards strictly dominate (as in these curves “lie above”) the Chrysler → Chrysler transition hazard at all points of time. (2) higherincome consumers are more brand-loyal than lower-income consumers. 21 .In Table 4. are more likely to keep track of the latest trends in the automobile industry.” More educated consumers. new model releases etc. where one would expect a household’s conditional probability of replacing their currently held automobile brand to increase over time. and (3) more educated consumers are less brand-loyal than less educated consumers. on the other hand. This makes intuitive sense.9 We find that (1) married consumers are less brand-loyal than singles. we plot the estimated hazard functions for the 16 possible brand-pair transitions.

22 . 5. ignoring nonstationarity renders the effect of marital status on brand loyalty to be insignificant. we investigate the substantive consequences of ignoring one or more aspects of our proposed model. i.38..03).11. that Chrysler appears to be in the weakest competitive position in the market in terms of having insufficient repeat-purchases. Next. instead of 0. instead of 0. From comparing the (time-varying) log10 We thank an anonymous reviewer for suggesting this hypothesis and leading us to include satisfaction as a covariate in our model. The reduction is most dramatic for GM (0.. we plot the estimated hazard functions (as flat lines) for 12 out of the 16 possible brand-pair transitions (see Figure 1).. non-stationarity.hazards (i.1.e. i → k ). we present the estimation results from a restricted version of our proposed model that assumes the household’s transition rate matrix to be stationary. Comparing the third and fourth columns of Table 4.e. In terms of demographic effects.e. It is clear. The effect of satisfaction gets significantly overstated (0. covariates and the parsimonious loyalty structure implied by equation (4). Consequences of ignoring Non-Stationarity In the third column of Table 4. The effects of income and education remain the same as before. we find that the Chrysler → GM and Chrysler → Ford transition hazards dominate the others. it is clear that the estimated brand loyalties for all brands are significantly lower in magnitude if one ignores non-stationarity.10 In order to interpret the estimated exponential hazard parameters.76). as well as being vulnerable to its existing customers switching away to its two main rivals. therefore. the hazard functions characterizing each transition are exponential (rather than log-logistic). This indicates that existing statistical models of the satisfaction → loyalty link (such as Mittal and Kamakura 2001) may yield biased estimates of the link by not taking into account the effects of time since last purchase. i.

23 . Overall.” by the restrictive assumption that they are time-invariant under the stationary model. of automobile consumers in the market. the transition rates pertaining to a switch towards Ford automobiles are overstated if one ignores covariates.logistic hazards to their (time-invariant) exponential counterparts.Consequences of ignoring Covariates In the second column of Table 4 we present the estimation results from a restricted version of our proposed model that not only assumes the household’s transition rate matrix to be stationary (as in the model represented in the third column of Table 4).2. we find that the estimated brand loyalties are slightly overstated if one ignores covariates. but also ignores the effects of household covariates. as well as temporal replacement tendencies. but more importantly their monotonically increasing shape is “camouflaged. which is consistent with our earlier finding that model fit worsens only slightly by ignoring covariates in the estimation. comparing the third and fourth columns of Table 4 makes it clear that wrongly assuming stationarity in the Markov process can substantially weaken substantive inferences obtained about both brand loyalties. Comparing the second and third columns of Table 4. we feel that ignoring covariates does not substantially alter the substantive conclusions obtained regarding the included variables. 5. Overall. it is clear that not only are the magnitudes of the transition rates severely under-estimated. In terms of the estimated hazard rates.

we simultaneously present the corresponding transition matrix that is implied by the parameter estimates of the full version of our proposed model (as represented in the fourth column of Table 4). this shows that from a statistical standpoint one loses little by employing a more parsimonious (and. we see that the transition rates are remarkably similar between the two. estimates the transition hazards in a completely unrestricted manner. Consequences of not imposing the Parsimonious Brand Loyalty Structure In Table 5 we present (within parentheses) the estimation results from a restricted version of our proposed model that not only assumes the household’s transition rate matrix to be stationary (as in the model represented in the third column of Table 4). instead. as mentioned earlier. Comparing the two sets of numbers in Table 5.5. In Table 5. This shows that the parsimonious brand loyalty structure that we propose is flexible enough to correctly recover the transition rates that one recovers under the unrestricted model specification. therefore. instead of estimating the transition rates in a completely unrestricted manner. a model (such as the parsimonious representation) that explicitly models brand loyalties is easier to interpret and of more practical value to marketing practitioners. and ignores the effects of household covariates (as in the model represented in the second column of Table 4). computationally elegant and intuitively interpretable) representation of brand loyalty.3. [Insert Tables 5 and 6] 24 . Coupled with our earlier findings that model fit deteriorates only slightly by imposing our proposed brand loyalty structure in the model. Further. but also does not impose the parsimonious brand loyalty structure proposed in equation (4) and. to the extent that the focus of this study is on brand loyalties.

These matrices are presented in Table 7. Comparing our approach to Colombo and Morrison (1989) For comparison purposes. by additionally modeling transition times (as in our proposed model).4. using our proposed model. second column of Table 4). We see that the Colombo and Morrison (1989) points to Ford as the brand with the highest brand loyalty among the “Big 3” US manufacturers. the Colombo and Morrison (1989) points to GM as the brand with the highest value. [Insert Table 7] In order to test whether our model’s additional focus on modeling brand-pair specific transition rates.5. we compare the aggregate transition matrix implied by our proposed model to that estimated by the Colombo and Morrison (1989) approach. In terms of zero-order brand choice probabilities. we can obtain a more complete understanding of brand loyalties in the market. and to Chrysler as the brand with the lowest loyalty. There appear to be some discernible 25 . for example. both of which are qualitatively consistent with the results from our proposed model. weakens our model’s ability to recover aggregate numbers of brand-pair transactions. This underscores the practical value of the elegant model of Colombo and Morrison (1989) in obtaining an excellent qualitative understanding of brand loyalties in the automobile market. we can predict future (time-variant) market shares for brands and perform policy simulations pertaining to the effects of marketing activities on such shares (as we will demonstrate in the next section on Managerial Implications). and to Chrysler as the brand with the lowest value. The results from this model are presented in Table 6. compared to Colombo and Morrison (1989). we estimate the Colombo and Morrison (1989) model of brand loyalties (which models only the aggregate numbers of transitions and does not model transition times). For example. which are also qualitatively consistent with the estimates of baseline hazard rates implied by our proposed model (see. However.

. Managerial Implications In order to demonstrate the practical usefulness of our proposed model of brand loyalties for automobile brand manufacturers. while that associated with Colombo and Morrison (1989) is 0. with the estimated transition probability for the Ford → GM transition being 0. we compute the root mean-squared error (RMSE) associated with both tables. but also predicts the observed transition probabilities better than the Colombo and Morrison (1989) model. We find the RMSE of our proposed model to be 0. we use our estimated model parameters to predict unconditional monthly market shares of each of the three major brands in our data – GM.01. as shown below. and 0.10 under our proposed model.14 under Colombo and Morrison (1989). This prediction exercise is done as follows: for each consumer (h) in the data. 26 .11. i. Our proposed model generalizes the elegant brand loyalty model of Colombo and Morrison (1989) by incorporating the effects of transition times in their framework.differences between the two tables. a brand’s ability to encourage both consumers’ repeatpurchases. Ford and Chrysler – over 12 months in the future. We believe this finding to be the coup-de-grace of our proposed modeling framework. for example. This shows that our model not only is able to account for two separate sources of brand loyalty. 6. in relation to the actual transition probabilities observed in Table 1(b). and quicker product replacements by consumers. starting from the month following the period of survey. we compute the discrete transition probability of the consumer making a transition from his/her currently owned brand ih (which was purchased by the consumer uh months prior to the month of survey) to brand j exactly t months from the month of survey. In order to see which of these tables is “closer” to the “truth” (represented by the observed transitions in Table 1(b)).e.

leads to market share increases of 0. respectively. respectively). over the 12 months following the study period. Using the model of Colombo and Morrison (1989). we decrease it to 7.5. and 11 If this procedure increases a GM buyer’s satisfaction score beyond 7 (as it would for any respondent whose satisfaction score for GM was higher than 6.15%. The same assumption for Ford and Chrysler.3%.08% for Ford and Chrysler. in the first case. 11 This leads to a predicted increase in market share. Our demand forecasts can guide production decisions of automobile manufacturers. For this purpose. We also perform a simulation exercise to understand the benefits of customer satisfaction improvement programs for automobile manufacturers. taken one at a time. of 0.92.5).Pih j ( t ) = exp − uh + t J uh k =1 k≠ j µi k ( u ) du exp − h uh + t −1 µi h j ( u ) du 1 − exp − uh + t µi uh uh + t −1 h j ( u ) du (13) where uh stands for the elapsed time since the last purchase of consumer h.24% and 0. respectively.58% for GM (and a decrease of market share of 0. for the two brands (and decreases for GM and Chrysler of 0. This yields a new average satisfaction score across all respondents in the data of 5. we assume that customer satisfaction scores for GM buyers in our sample (whose current average in the data is 5. The above-mentioned transition probability is then summed over all consumers in the data to obtain the unconditional market share of brand j at time t. 27 . far less such non-stationary market share plots.8% and 0.58) increases by 0.38% and 0. These predicted market shares are plotted for the three brands in Figure 2. one cannot generate market share forecasts (since their model ignores consumers’ inter-purchase times). [Insert Figure 2] Our model is able to generate these time-varying market share forecasts because of the non-stationarity that arises from modeling the effects of consumers’ inter-purchase times.

in the second case). render our model parameters invalid for prediction purposes (see Frances 2005). 2006). transmission etc. Our empirical approach presents GM with a systematic way to quantify. We thank an anonymous reviewer for alerting us to this issue. engine. Given the high market stakes involved. while tracking switching measures may point to which competitors appear to be primarily stealing sales away from GM brands. therefore.000 automobiles sold (Forbes.14%. handling. the extent of repeat-purchasing. automobile accessories. using readily available survey data. (Mittal and Kamakura 2001.decreases for GM and Ford of 0. 12 We must acknowledge here that our simulations are susceptible to the Lucas Critique to the extent that our “what if” scenario may structurally alter the market structure and. it is incumbent upon GM to first quantify the extent of brand loyalties for its brands. For example. associated with each of its existing brands. July 3. quality of work done. and switching to. a GM brand with high estimated loyalty can be understood to be less susceptible to competition from competitors’ brands. as well as the effects of customer satisfaction on these loyalties. and losing one point of market share for GM could mean the shutting down of one of its plants. respectively. Systematically tracking brand loyalties of its brands over time may provide early warning indicators to GM about downward trends in the strengths of some of its brands.). honesty etc. switching away from. For example. 28 . Mittal. before they can address the strategic “what to do” question to manage customer churn. 12 Every point of market share in the US automobile industry is worth about 170.08% and 0. Kumar and Tsiros 1999). key drivers of customer satisfaction for automobiles include dealership service quality (vehicle ready when promised. A proper descriptive diagnosis of market conditions using our proposed approach can assist GM in better planning its marketing strategies going forward. roominess.

We find that our proposed model accurately reflects the observed outcomes in the data. we find that consumers’ replacement likelihood for automobiles increase over time elapsed since the previous automobile purchase. Continuous-Time. The most important modeling innovation of our proposed model over existing statistical models for last-move data lies in its relaxing the traditional assumption of a stationary Markov process. Modeling the non-stationarity of the Markov process is found to both dramatically improve model fit and lead to more plausible temporal patterns of automobile replacement patterns. We obtain several interesting findings pertaining to demographics. We also propose a suitable estimation approach to recover the parameters of our proposed statistical model. We also find that the parsimonious brand loyalty structure that we propose – which is inspired by the elegant brand 29 . in the sense of enjoying the lowest repeat-purchase rates and/or highest switching rates away from the brand. Summary and Conclusions In this paper. doing substantially better than alternative models. we study brand loyalties for durables using automobile survey data from respondents that are peculiarly censored in the sense of only tracking elapsed times since transitions.7. Specifically. instead of remaining time-invariant. Markov model with a parsimonious brand loyalty structure – that is appropriate for such “last move” data. We find that this increase is heterogeneous across different brand-pair combinations. during the study period. Specifically single / higher-income / less-educated consumers are found to be more brand loyal than married / lower-income / more-educated consumers. and find that Chrysler is significantly “weaker” than GM and Ford. as opposed to the transition times themselves (and this censoring problem is typically encountered in commercially available survey data for durables). We estimate the degree of brand loyalty for the three big manufacturers in the market. We propose a statistical model of brand loyalties – a Multi-State.

It would be fruitful to simultaneously administer both types of surveys to different samples of respondents (i. investigating the reasons for the difference will be instructive. Last.e. where the parsimony afforded by our parsimonious brand loyalty specification can be computationally much simpler to estimate than the fully unrestricted specification. which means that there may be systematic behavioral differences between the groups (which raises the question of which group is superior for automobile companies to survey in general). and our type of survey to a random sample of actual or potential car buyers) to see whether the substantive findings about brand loyalties obtained using the two survey datasets are similar. our model more accurately explains the observed aggregate numbers of transitions than Colombo and Morrison (1989) despite our model’s simultaneous focus on also explaining transition times.. Another reason for the difference – as shown in Bayus. One reason for the difference could be that the two samples are not “matched. the Bayus-type survey to new car buyers. This finding should be encouraging to marketing practitioners who typically deal with data containing many brands. If the results are different. one group represents current buyers only.loyalty model of Colombo and Morrison (1989) – as an alternative to the fully unrestricted transition matrix.e. but not the least. Hong and Labe (1989) – could be that retrospectively remembering the time of purchase of the previously (as opposed to the currently) owned brand 30 .” i. Our survey data track the time elapsed between the most recent purchase of the respondent and the survey date (which is zero for each respondent in Bayus’ survey data). One interesting area for future research is the following: Bayus’ (1992) survey data track the time elapsed between successive purchases of each respondent. while accurately maintaining the key substantive implications obtained from the model. while the other does not. only slightly worsens model fit compared to the fully unrestricted model..

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15 0.3 Market Shares 0.1 0. FORD AND CHRYSLER .2 0.35 0.4 0.25 0.FIGURE 1: ESTIMATED TRANSITION HAZARDS ASSOCIATED WITH SWITCHING AWAY FROM GM (i=GM → j) 0.05 0 1 2 3 4 5 6 7 8 9 10 11 12 Months After Survey Ford GM Chrysler FIGURE 2: PREDICTED FUTURE MARKET SHARES OF GM.

16) 19 (0.61) 13 (0.19) 335 Ford 43 (0.23) 151 (0.67) 296 Total 426 134 83 229 870 * Numbers within parentheses represent transition probabilities.63) 13 (0.27) 42 (0.24) 23 (0.07) 79 Other 103 (0. Column = currently owned brand) GM GM Ford Chrysler Other Total 258 (0.17) 19 (0.08) 160 Chrysler 22 (0.10) 29 (0.35) 15 (0.10) 22 (0.TABLE 1 Observed Brand Switching Matrix (Row = previously owned brand.10) 85 (0.05) 13 (0. 34 .

181 14.97 -3546.50 # param. 19 13 9 16 35 .96 1.69 45.000 22 7 Min 0 * 2.72 7067.500 8 1 TABLE 3 Fit Statistics AIC = -2*LL + 2 (# parameters) SBC = -2*LL + [ln (# households)] * [# parameters] Number of households = 870 LL Full Model Stationary Version Stationary Version w/o Covariates Stationary Version w/o Covariates & Loyalty Structure -2791.12 7047.32 7129.11 -3507.65 -3520.74 Max 57 * 110.94 7110.74 5.TABLE 2 Descriptive Statistics (Number of respondents in sample: 870) Mean Elapsed Time (months) Marital Status (1 = Single.60 AIC 5613.93 7153.08 * 24. 2 = Married) Income ($) Education (years) Satisfaction 7.14 7123.2 SBC 5704.747 2.26 1.37 Std Dev 4.

50 (0.53) 7.85 (0.02 (0.39) 4.01 (0.00) 0.00) 0.05 level except for marital status in the stationary model.00) 0.00) 0.01) 0.02) 0.13) -0.04 (0.01) (0.01 (0.04) 0.01) 0. b: Standard errors within parentheses.08) 0.00) 0. All estimates are significant at the 0.63 (0.38 (0.08 (0.93 a: Stationary models assume baseline hazard to be exponential rather than log-logistic.07 (0.68 (0.05 (0.05) 0.04) 0.32 Parameters GM Brand Loyalties ( αi ) Ford Chrysler Other Marital Status Income Education Attitudinal Effect ( βA ) Satisfaction GM Baseline Hazard Rates – Shape Parameters (γ j ) Ford Chrysler Other GM Baseline Hazard Rates – Scale Parameters ( λj ) Ford Chrysler Other Demographic Effects ( βD ) Increase in Hazard Rate 0.94 SBC 7153.34) 5.14 7129.07) 0.01) 0.05 (0.34 (0.11 (0.02) -0.03 (0.01) 870 19 -2791.73 (0.08) 0.13 (0.72 5704.11 -3520.00) n/a n/a n/a n/a Full Version of Proposed Model Estimatesb 0.05) Stationary Version of Proposed Modela Estimatesb 0.01 (0.65 5613.03 (0.03 0.01 (0.76 (0.00) 0.TABLE 4 Results from the Stationary Version and Full Version of Our Proposed Model Stationary Version of Proposed Model without Demographicsa Estimatesb 0.01) 0.01) due to Loyalty ( δ ) Effect of modal replacement time ( τ ) Error standard deviation (σ ) Number of Households 870 870 Number of Households 9 13 Log-likelihood Value -3546.71 (0.13 (0.04 (0.97 AIC 7110.83 (0. 36 .05 (0.11 (0.86 (0.05) 0.02) 0.02 (0.04 (0.50 (0.03 (0.00) -0.01) 0.22 7067.06 (0.47 (0.01) 0.54 (0.00) -0.00) 0.01) n/a n/a n/a n/a 0.00) 0.00) 0.00) 6.09) 0.12 (0.76 (0.40) 0.02 (0.75 (0.02) 0.

39 Other *Standard errors within parentheses.05) 0.06 (0.06) 0.31 (0. Number of Observations = 16. Number of Parameters = 7 LL = .02 (0.02) 0. AIC = 1901.TABLE 5 Transition Rates Implied by our Proposed Model GM GM Ford Chrysler Other 0.04) 0.09 (0.04 (0.01) Other 0.44 (0.04) 0.04 (0. BIC = 1907.42 (0.10) 0.12 (0.03) 0.02) 0.01) 0.26 (0.05) 0.07) 0.54 (0.03 (0.18 (0.88.02 (0.01) 0. All estimates are significant at the 0.07) 0.02 (0.76.02 (0.06) 0.02 (0.02) 0.01 (0.05 level.02) Ford 0.04) 0.01) 0.03 (0.943.10 (0.01 (0.17 37 .01 (0.01 (0.05) 0.01) Chrysler 0. TABLE 6 Results from the Colombo and Morrison (1989) Model Parameters GM Brand Loyalties ( αi ) Ford Chrysler Other GM Zero-order Brand Choice Probabilities ( µi ) Ford Chrysler Estimates* 0.06) 0.07) * Numbers within parentheses represent the transition rates implied by the stationary version of our proposed model without covariates and without the parsimonious brand loyalty structure.

10) 0.34) 0.18 (0.35 (0.10) Chrysler 0.14) 0.23) 0.23) 0.17 (0.67 (0.60 (0.23 (0.10 (0.TABLE 7 Estimated Transition Probabilities under Our Model versus Colombo and Morrison (1989) Model (within parentheses) GM GM Ford Chrysler Others 0.13) 0.05) 0.26 (0.29) 0.07 (0.63 (0.17) Ford 0.07) 0.07) Others 0.05 (0.16 (0.66) 38 .10 (0.24 (0.18) 0.10 (0.08 (0.60) 0.62) 0.