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is a
technique.
- It provides information about a decision situation.
- It is a
, not an optimizing technique.
- Specifically applicable to systems that exhibit probabilistic
movements from one
(or condition) to another.
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- The brand-switching problem used for discussion.
- The brand-switching problem analyses the probability of customers¶ changing brands of a
product over time.
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- Information available from Markov analysis is the probability of being in a state at some future time.
- In example, the manager wants to know the probability that a customer would trade with them in
month 3 given that the customer trades with them in month @.
- Probability of a customer¶s trading with Petroco in month 3 given that the customer initially traded
with Petroco in month @ is the sum of two branch probabilities associated with Petroco: .36 + .08 = .44.
- For probability of a customer¶s purchsasing gasoline from National in month 3, add probabilities
associated with National: .24 + .32 = .56.
Probabilities of future states
given that a customer trades
with Petroco this month
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robabilit of rade in
onth 3
tarting tate etroco ational um
etroco . . 1.
ational . .7 1.
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- Given that a customer initially purchased gasoline from National, the probability of
purchasing gasoline from National in month 3 is .08 + .64 = . 2.
- The probability of the customer trading with Petroco in month 3 is .@2 + .@6 = .28.
Probabilities of future states
given that a customer trades
with National this month
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- The probabilities of being in a particular state in the future can be determined by using
°atrix algebra
- A transition °atrix includes the transition probabilities for each state of nature.
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- Symbology
Probability of trading with Petroco in period i, given customer started with Petroco: Pp (i);
Probability of trading with National in period i, given customer started with Petroco: Np (i).
- Probability of a customer¶s trading at National in month 2, given that customer initially
traded at Petroco is
Np(2)
- Probability of a customer¶s trading with Petroco and National in a future period i, given
that customer traded initially with national is
Pn(i) and Nn (i)
- If a customer is presently trading with Petroco, the following probabilities exist
Pp (@) = @.0 and Np (@) = 0
- These probabilities in matrix form:
[Pp (@) Np (@)] = [@.0 0.0]
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- Computing probabilities of a customer trading at either station in future months using
matrix multiplication. In future time periods, the
Month 2: [Pp(2) Np (2)] = [@.0 0.0] .60 .40
.20 .80
= [.60 .40]
Month 3: [Pp (3) Np (3)] = [.60 .40] .60 .40
.20 .80
= [.44 .56]
Month 4: [Pp (4) Np (4)] = [..44 .56] .60 .40
.20 .80
= [.38 .62]
Month 5: [Pp (5) Np (5)] = [.35 .65]
Month 6: [Pp (6) Np (6)] = [.34 .66]
Month : [Pp ( ) Np ( )] = [.34 .66]
Month 8: [Pp (8) Np (8)] = [.33 .6 ]
Month 9: [Pp (9) Np (9)] = [.33 .6 ]
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) **
- State probabilities in future time periods:
[Pp(i) Np (i)] = [.33 .6 ]
The probability
Pp(i) for future
values of i
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- The probability of ending up in a state in the future is independent of the starting state.
- Computing future state probabilities when initial starting state is National:
Month @: [Pn(@) Nn (@)] = [0.0 @.0]
.60 .40
Month 2: [Pn (2) Nn (2)] = [0.0 @.0]
.20 .80
= [.20 .80]
Month 3: [Pn (3) Nn (3)] = [.20 .80] .60 .40
= [.28 . 2] .20 .80
Month 4: [Pn (4) Nn (4)] = [.3@ .69]
Month 5: [Pn (5) Nn (5)] = [.32 .68]
Month 6: [Pn (6) Nn (6)] = [.33 .6 ]
Month : [Pn ( ) Nn ( )] = [.33 .6 ]
Month 8: [Pn (8) Nn (8)] = [.33 .6 ]
Month 9: [Pn (9) Nn (9)] = [.33 .6 ]
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)) **
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are average, constant probabilities that the system will
be in a state in the future.
- For service station example:
.33 = probability of a customer¶s trading at Petroco after a number of months
regrdless of where customer traded in month one.
.6 = probability of a customer¶s trading at National after a number of months
regardless of where customer traded in month one.
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- Combining operations into one matrix:
p(2) p(2) @ 0 .60 .40
onth 2 :
n(2) n(2)
0 @ .20 .80
.60 .40
.20 .80
p(3) p(3) .60 .40 .60 .40
onth 3 :
n(3) n(3)
.20 .80 .20 .80
p(4) p(4) .44 .56 .60 .40
onth 4 :
n(4) n(4)
.28 . 2 .20 .80
.38 .62
.3@ .69
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- At some point in the future the state probabilities remain constant from period to period.
- After steady state is reached it is not necessary to designate the time period.
-Steady state probabilities can be computed by developing a set of equations using matrix
operations and solving them simultaneously:
.60 .40
[Pp Np] = [Pp Np] .20 .80
Pp = .6Pp + .2Np
Np = .4Pp + .8Np
Pp + Np = @.0
Np = @.0 - Pp
Pp = .6Pp + .2(@.0 - Pp) = .6Pp+ .2 - .2Pp = .2 + .4Pp
..6Pp = .2
Pp = .2/.6 = .33
Np = @.0 - Pp = @.0 -.33 = .6
[Pp Np] = [.33 .6 ]
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- Re-evalution with modified transition probabilities resulting from Petroco improving its
service.
- Re-evalution indicates Petroco will get @,200 customers in any given month in the long
run, increasing its customer base by 2@0 customers (@,200 - 990).
- Management must evaluate trade-off of cost of improved service and increase of 2@0.
customers.
- Analysis with new transition probabilities:
. 0 .30
[Pp Np] = [Pp Np]
.20 .80
solving, Pp = .2/.5 = .4
and thus, Np = @- Pp = @ - .4 = .6
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- Rents in three states; trucks are rented on a daily basis and can be rented and returned in
any of the three states.
- Transition matrix: V M NC
Virginia .60 .20 .20
Maryland .30 .50 .20
North Carolina .40 .@0 .50
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- Once the system leaves a transient state, it will never return (state 3 in example):
@ 2 3
@ .40 .60 0
T = 2 .30 . 0 0
3 @.0 0 0
- A transition matrix is cyclic when the system moves back and forth between states:
@ 2
T = @ 0 @.0
@.0 0
2
- Once the system moves into an
, it is trapped and cannot leave (state 3 in
example): @ 2 3
@ .30 .60 .@0
T = 2 .40 .40 .20
0 0 @.0
3
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- Label submatrices:
I 0
T =
Q
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@ 0
- Form identity matrix, I =
0 @
0 0
- Matrix of zeros, 0=
0 0
. 0 0
R=
.50 .50
0 .30
=
0 0
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- The
, F, indicates the expected number of times the system will be in
any of the nonabsorbing states before absorbtion occurs.
- Determine fundamental matrix, F:
F = (I - )-@
- Determine F by taking inverse of the difference between identity matrix, I, and :
@ .30
F=
0 @
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- The F ÔR matrix reflects the probability that the debt will eventually be absorbed given
any starting state.
- Calculating the the F Ô R matrix:
@ .30 . 0 0
FÔR= Ô
0 @ .50 .50
.85 .@5
=
.50 .50
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"$ $#
- Determine what portions of these funds will be collected and what will result in bad debts
given that company has accounts receivable of $4,000 in month @ and $6,000 in month 2.
.85 .@5
Determination of accounts receivable = [4,000 6,000] Ô
.50 .50
= [6,400 3,600]
- Of $@0,000 owed, bank can expect to receive $6,400 and $3,600 will become bad debt.
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