MARKOV ANALYSIS

Is a technique that deals with the probabilities of future

occurrence by analysing present known probabilities .
Makes the assumption that the system starts in an initial
period.
Predicting for future periods involves knowing the
systems likelihood or probability of changing from one
period to another .
These probabilities can be collected and placed in a
matrix- Transition probability Matrix .
For a system ,there are a finite number of states and the
states are both collectively exhaustive and mutually
exclusive .
Has numerous application in Business .
Vector of state Probability
Consider a small town with three grocery stores .There could be a total of
100,000 people that shop at the three grocery stores during any given
month . 40,000 people may be shopping American Food Stores , 30,000
may be at Food Mart , 30,000 may be at Atlas Food .
State -1 : American Food Store : State 2: Food Mart
State -3 :Atlas Food
Now , (1)=Vector of state probabilities for the three grocery stores for the
period-1

1
= 0.4 = probability that a person will shop at American Food

2
=0.3 = ,, at Food Mart.

3
=0.3 = ,, at Atlas Food .
Note : 1)The probabilities in the vector of states for the store represent the
market shares for these stores for the first period . Thus American Food
has 40% of the market , Food Mart has 30% , and Atlas Food has 30% in
period -1 .
2)When dealing with market shares , market shares can be used in place of
probability values .

Example
Example :Two competing manufacturers might have
40% and 60% of the market share respectively , as initial
state .Perhaps in the next two months , the market
shares for the two companies will change to 45% and
55% of the market .
STEPS :
Identify the states .
Determine the probability that the system is in this state
.Such information is then placed into a vector of state
probabilities :
(i) = Vector of state probabilities for period i
= (
1
,
2
, .,
n
)
where ,
1
,
2
, .,
n
: n- Number of states





Matrix of Transition Probabilities
The concept that allows us to get from a current state , such as market share ,
to a future state is the matrix of transition probabilities . This is a matrix of
conditional probabilities of being in a future state given a current state .
P =[ P
ij
]
mxn
, where,
P
ij
: conditional probability of being in state j in the future given the current
state i .
For Ex : P
12
is the probability of being in state 2 in the future given the event
was in state -1 in the period before .If we have observed over time that 10%
of the people currently shopping at store-1(state-1) will be shopping at
store 2 (state -2)next period ,then P
12
=0.1 or 10% .
Note : Individual P
ij
values are usually determined empirically .

(Market share beginning (State Transition Expected Market
of period-1) * Matrix) = shares beginning of
perod-2
Illustration
Two manufactures X and Y , are competing with each other
in a very restricted market .The state transition matrix for
the market summarizes the probabilities that customers
will move from one manufacturer to the other in any
month. Interpret the state transition matrix in terms of
a) Retention and Loss b) Retention and gain.
To
-----------------------------------------------
From X Y
X 0.7 0.3
Y 0.1 0.9
(a ) row Interpretation ( Retention and Loss )
( b ) column Interpretation (Retention and Gain )
Steady State Example for the
Machines For 15 Periods
Period State-1 State-2
1 1.0 0.0
2 0.8 0.2
3 0.66 0.34
4 0.562 0.438
5 0.4934 0.5066
6 0.44538 0.55462
7 0.411766 0.588234
8 0.388236 0.611763
9 0. 371765 0.628234
10 0.360235 0.639754
11 0.352165 0.647834
12 0.346515 0. 653484
13 0.342560 0. 657439
14 0. 339792 0.660207
15 0.337854 0.662145