 






\ .
8
In the abovementioned matrix, it is useful to note that the diagonal elements represent the case
of the household repeatbuying 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
=
=
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
= =
(1)
where ( ) 1 ( )
ij ij
S t F t = denotes the survivor function associated with the i j transition.
Equation (1) can be rewritten as follows.
( ) ( ) ( ),
ij ij ij
f t t S t = (2)
which, in turn, can be rewritten as shown below.
( ) ( ) ( )
1
0
exp
t
J
ij ij ij
j
f t t w dw
=
 
=

\ .
}
(3)
In this model specification, one can allow ( )
ij
t to follow a suitably chosen parametric
distribution, such as exponential, weibull, erlang2, loglogistic, lognormal, expopower 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 represents this option. On the other hand, the household can choose to replace
9
its currently held automobile, in which case it faces J replacement possibilities, and
( ) ( 1,..., )
ij
t j J = represent these options. In textbook discussions of the continuoustime
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 repeatbuying the same brand, while ( )
0 i
t 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 transitionspecific hazard functions are time
invariant, i.e., ( )
ij ij
t t = . This simplifies equation (3) to ( )
1
exp
J
ij ij ij
j
f t t
=
 
=

\ .
. 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
households transitionspecific hazard functions, ( )
ij
t , as follows.
( ) ( ) ( ) ( ) ( )
( ) ( ) ( )
1 ,
1 ,
ii i i i i
ik i k
t h t h t
t h t
= + +
=
(4)
where ( )
ii
t is the hazard function characterizing repeatpurchase of brand i , ( )
ik
t 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
represents the
households probability of being brand loyal towards brand i , and 0 > 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
, this household will be in a
10
brand loyal state towards brand i , and with probability 1
i
, this household will be in a
switching state away from brand i . The households conditional hazard function for repeat
purchasing brand i will be higher (and equal to ( )
i
h t + ) 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
households 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
Morrisons (1989) elegant moverstayer 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 timeinvariant transitionspecific hazard
functions). In that case, equation (4) involves only 2 1 J + estimable parameters (i.e.,
different '
i
J s , different '
k
J h s , and ), while equation (3) involves
2
J estimable parameters
(i.e.,
2
different '
jk
J s ). 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 transitionspecific hazard functions to be nonstationary and,
therefore, involve more parameters), the computational simplicity of the parsimonious
specification over the fully unrestricted specification will be even more remarkable.
11
Next, we specify the baseline hazard function characterizing the households purchase of
brand j , i.e., ( )
j
h t , to follow a loglogistic distribution, as shown below.
( )
( )
( )
1
,
1
( , 0)
j
j
j j j
j
j
j j
t
h t
t
=
+
>
(5)
This renders the Markov process to be nonstationary. 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 loglogistic 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 householdspecific covariates (i.e., demographic characteristics, and satisfaction
scores for the currently owned brand), as shown below.
0
,
i i
X = + (6)
where
0i
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 denotes the
corresponding columnvector 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 loglogistic distribution to other
distributions using purchase timing data on packaged goods. In our case, we empirically verified that the loglogistic
distribution was superior to the Erlang2 distribution in terms of explaining our data.
12
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 respondents 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 17). Mittal and Kamakura (2001)
and LambertPandraud, 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 MyungSoo Lee (Baruch) and Brian Ratchford (UTDallas). We thank
them for their generosity in sharing their data with us.
13
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).
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). From this table, it is clear that GM is the largest among the three
brands. Also, the transition probability associated with repeatpurchase 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 GMs
competitive threat than it is to Fords competitive threat.
[Insert Table 1 here]
While Table 1 reveals the aggregate transition patterns in the data, it does not reveal the
patterns of interpurchase times associated with the various brandpair 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 = 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.
14
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 interpurchase 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 rightcensored 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 hs
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 . 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
=
 
=


\ .
}
, 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
= =
 
=


\ .
}
(7)
where H stands for the total number of households in the sample,
h
t stands for the
(unobserved) interpurchase time between household h s purchases of brands
h
i and
h
j , and
h
u
15
stands for the (observed) elapsed time since household h s most recent transition. In the
stationary Markov process case (i.e., when ( )
ij
t does not depend on t ), the abovementioned
likelihood function reduces to the following.
1 1
exp .
h h h
H J
i j h j k
k h
L u dt
= =
 
=

\ .
(8)
In other words, in the stationary Markov process case, the econometrician bears no consequences
of not observing householdspecific interpurchase times,
h
t , since only the elapsed times,
h
u ,
appear in the sample likelihood function! The abovementioned sample likelihood function can
be straightforwardly maximized using gradientbased 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 methodofmoments 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 nonstationarity in the Markov process, as well as investigate the effects of
household variables on brand loyalties (by allowing ( )
ij
t to depend on X , as shown in
equations (4) and (5)). We discuss how to estimate our model next.
In the nonstationary 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 householdspecific interpurchase times,
h
t , are not observed in last move data.
Only elapsed times,
h
u , are observed. Therefore, we must treat unobserved interpurchase times,
h
t , as latent variables and then maximize the appropriate sample likelihood function given in
16
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 interpurchase 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 = + + (9)
where 0 is an estimable parameter,
2
~ (0, )
h
N is an error term that is assumed to be iid
across households, and
*
h h
i j
t is the mode associated with the loglogistic transition density,
h h
i j
,
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
 


+
\ .
= (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 Schmertmanns 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) interpurchase time,
h
t , between the households 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 loglogistic transition density
characterizing the
h h
i j transition is the most likely value of the interpurchase 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 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
h
of
h
from
2
(0, ) N ) for household h is (the derivation is available in a webbased 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
=
(
= + = +
(
(
+ = +
(
}
(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
h
of
h
and
( )
( )
( )
1
,
1
( , 0)
k
k
k k k
k
k
k k
t
h t
t
=
+
>
(12)
under the loglogistic specification for the transitionspecific hazard functions. The
unconditional household likelihood function is obtained by averaging the conditional likelihood
functions (yielded by equation (11)) over all draws
h
of
h
. 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 gradientbased 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 loglogistic hazards and demographic effects),
2. Stationary version (i.e., exponential, instead of loglogistic, 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 nonstationarity 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 methodofmoments approach taken by Schmertmann (1999).
In Table 3, we report three fit statistics LogLikelihood (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 loglogistic hazard substantially improves our ability
to explain the observed transitions and elapsed times compared to an exponential hazard. Said
differently, the MultiState, ContinuousTime Markov process is nonstationary 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 Erlang2 baseline hazard function (which also allows for a nonstationary 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 loglogistic 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 brandloyal state, is
positive (0.02), as expected. This implies that a household in a brandloyal state will show an
increased tendency to repeatpurchase 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 brandloyal than singles, (2) higher
income consumers are more brandloyal than lowerincome consumers, and (3) more educated
consumers are less brandloyal than less educated consumers. We can rationalize findings (2)
and (3) as follows: To the extent that higherincome consumers are more likely to buy more
expensive automobiles (such as Cadillac) for prestige reasons, they are more likely than lower
income to repeatpurchase 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 lesseducated 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 loglogistic
hazard parameters, we plot the estimated hazard functions for the 16 possible brandpair
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 households
conditional probability of replacing their currently held automobile brand to increase over time.
In terms of the repeatpurchase 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 nondurable 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 repeatpurchases, 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., nonstationarity, covariates and the parsimonious loyalty structure implied
by equation (4).
5.1. Consequences of ignoring NonStationarity
In the third column of Table 4, we present the estimation results from a restricted version
of our proposed model that assumes the households transition rate matrix to be stationary, i.e.,
the hazard functions characterizing each transition are exponential (rather than loglogistic).
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 nonstationarity. 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 brandpair transitions (see Figure 1). From comparing the (timevarying) 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 (timeinvariant) exponential counterparts, it is clear that not only are the
magnitudes of the transition rates severely underestimated, but more importantly their
monotonically increasing shape is camouflaged, by the restrictive assumption that they are
timeinvariant 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 households 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 households 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 zeroorder 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 (timevariant) 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 models additional focus on modeling brandpair specific
transition rates, compared to Colombo and Morrison (1989), weakens our models ability to
recover aggregate numbers of brandpair 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 meansquared 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 brands 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 coupdegrace 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
+ + +
=
+
 
(    

( =  
  
(

\ . \ .
\ .
} } }
(13)
where u
h
stands for the elapsed time since the last purchase of consumer h. The abovementioned
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 timevarying market share forecasts because of the
nonstationarity that arises from modeling the effects of consumers interpurchase times. Using
the model of Colombo and Morrison (1989), one cannot generate market share forecasts (since
their model ignores consumers interpurchase times), far less such nonstationary 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 buyers 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 repeatpurchasing, 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 MultiState, ContinuousTime, 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 lastmove data lies in its relaxing the
traditional assumption of a stationary Markov process. Modeling the nonstationarity 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 timeinvariant. 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 repeatpurchase rates and/or highest switching rates
away from the brand, during the study period. We obtain several interesting findings pertaining
to demographics. Specifically single / higherincome / lesseducated consumers are found to be
more brand loyal than married / lowerincome / moreeducated consumers. We find that this
increase is heterogeneous across different brandpair 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 models 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 Bayustype 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).
References
Bayus, B. L. (1992), Brand Loyalty and Marketing Strategy: An Application to Home
Appliances, Marketing Science, 11, 1, 2138.
Bayus, B. L., S. Hong and R. P. Labe (1989), "Developing and Using Forecasting Models of
Consumer Durables: The Case of Color TV," Journal of Product Innovation
Management, 6, 1, 519.
Chintagunta, P. K., and Haldar, S. (1998), Investigating Purchase Timing Behavior in Two
Related Product Categories, Journal of Marketing Research, 35, 1, 4353.
Chintagunta, P. K., and A. R. Prasad (1998), An Empirical Investigation of the Dynamic McFadden
Model of Purchase Timing and Brand Choice: Implications for Market Structure, Journal of
Business and Economic Statistics, 16, 1, 212.
Colombo, R. A. and D. G. Morrison (1989), "A Brand Switching Model with Implications for
Marketing Strategy," Marketing Science, 8, 1, 8999.
Frances, P. H. (2005), "On the Use of Econometric Models for Policy Simulation in
Marketing," Journal of Marketing Research, 42, 1, 414.
Givon, M. (1984), "VarietySeeking through Brand Switching," Marketing Science, 3, 1, 122.
Gonul, F. and K. Srinivasan (1993), "Consumer Purchase Behavior in a Frequently Bought
Product Category," Journal of the American Statistical Association, 88, 4, 12191227.
Honore, B. E. and E. Kyriazidou (2000), "Panel Data Discrete Choice Models with Lagged
Dependent Variables," Econometrica, 68, 4, 839874.
LambertPandraud, R., G. Laurent and E. Lapersonne (2005), "Repeat Purchasing of New
Automobiles by Older Consumers: Empirical Evidence and Interpretations," Journal of
Marketing, 69, 2, 97113.
32
McCarthy, P. S., P. K. Kannan, R. Chandrasekharan and G. P. Wright (1992), Estimating
Loyalty and Switching with an Application to the Automobile Market, Management
Science, 38, 10, 13711393.
Mittal, V. and W. A. Kamakura (2001), "Satisfaction, Repurchase Intent, and Repurchase
Behavior: Investigating the Moderating Effect of Customer Characteristics," Journal of
Marketing Research, 38, 1, 131142.
Mittal, V., P. Kumar and M. Tsiros (1999), "AttributeLevel Performance, Satisfaction, and
Behavioral Intentions over Time: A ConsumptionSystem Approach," Journal of
Marketing, 63, 2, 88101.
Ratchford, B., M. Lee, and D. Talukdar (2003), The Impact of Internet on Information
Search for Automobiles, Journal of Marketing Research, 40, 2, 193209.
Reichcheld, F. F. 1996. The Loyalty Effect: The Hidden Force Behind Growth, Profits and
Lasting Value, Boston: Harvard Business School Press.
Schmertmann, C. (1999), Estimating Multistate Transition Hazards from LastMove Data,
Journal of the American Statistical Association, 94, 445, 5363.
Seetharaman, P. B., and P. K. Chintagunta (2003), The Proportional Hazard Model for
Purchase Timing: A Comparison of Alternative Specifications, Journal of
Business and Economics Statistics, 21, 3, 368382.
Verhoef, P. C., F. Langerak, and B. Donkers (2007), Understanding Brand and Dealer
Retention in the New Car Market: The Moderating Role of Brand Tier, Journal of
Retailing, 83, 1, 97113.
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, 2941.
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, 457462.
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 loglogistic;
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
)
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
)
Education
0.01
(0.00)
0.01
(0.00)
Attitudinal Effect
(
A
)
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
)
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
)
Other n/a n/a
7.47
(0.40)
Increase in Hazard Rate
due to Loyalty ( )
0.03
(0.01)
0.04
(0.01)
0.02
(0.00)
Effect of modal
replacement time ( )
0.05
(0.00)
Error standard deviation
( )
0.04
(0.01)
Number of Households 870 870 870
Number of Households 9 13 19
Loglikelihood 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
)
Other
0.44
(0.06)
GM
0.31
(0.05)
Ford
0.18
(0.07)
Chrysler
0.12
(0.06)
Zeroorder Brand Choice Probabilities
(
i
)
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)