Modeling long term product and pricing decisions in the automobile market an agent based approach
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Modeling Long-Term Product and Pricing Decisions in the Automobile Market: An Agent-Based Approach Jie Cheng J.D. Power and Associates 14 th Face-to-Face DBD Open Workshop Meeting 2002 ASME International Design Engineering Conference Montreal, Canada, September 29 th , 2002

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Modeling long term product and pricing decisions in the automobile market an agent based approach l.jpg

Modeling Long-Term Product and Pricing Decisions in the Automobile Market: An Agent-Based Approach

Jie Cheng

J.D. Power and Associates

14th Face-to-Face DBD Open Workshop Meeting

2002 ASME International Design Engineering Conference

Montreal, Canada, September 29th, 2002


Other jdpa contributors l.jpg
Other JDPA Contributors Automobile Market:

  • Dr. Irina Ionova

  • Dr. Jorge Silva-Risso

  • Dr. Jie Du

  • Dr. Wei Fan


Outline l.jpg
Outline Automobile Market:

  • Background

    • Long term product/pricing decisions in the automotive industry

  • Problem Description

  • Approach

    • Agent-based Simulation incorporating a consumer choice MNL model

  • Application

    • California Upper Middle Car Market (model years ‘97-’00)

  • Summary and Next Steps


Long term strategic decisions l.jpg
Long Term Strategic Decisions Automobile Market:

  • Types of Decisions

    • Platform/vehicle model introduction/exit

    • Vehicle freshening and feature upgrade

    • Vehicle quality improvement

    • Vehicle pricing strategy

    • Vehicle incentive strategy

  • Financial impact ranging from hundreds of millions to billions of dollars of investment or opportunity cost

  • Needs for market simulation tools to assess the effectiveness of decisions under different scenarios


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Focal Point of Study Automobile Market:

  • What are the effects of product content/ feature upgrade on market share/profitability?

  • What are the effects of product quality improvement on market share/profitability?

  • What are the pricing leverage with improved product features or quality?


Study approach l.jpg
Study Approach Automobile Market:

  • An agent-based simulation framework for the modeling of market players and their dynamic interactions

  • A disaggregate MNL model for the estimation of random utility coefficients which determine consumers’ vehicle purchase choices

  • Data Source:

    • Automotive retail sales data (JDPA/Polk)

    • Automotive retail production data (JDPA)

    • Automotive retail sales transaction data (JDPA)

    • Vehicle quality surveys (JDPA’s APEAL, IQS, VDI)

    • Consumer demographic data (JDPA, Census Database)


Research work on agent based market simulation l.jpg
Research Work on Automobile Market: Agent-based Market Simulation

  • A large number of social simulations using interactive agents have been reported, especially in the area referred to as Agent-Based Computational Economics [Tes98]

  • Three types of exploration [Tak00]

    • Simulation of primitive society such as “sugarscape” and “mechanism of emergence and collapse of money” [EA96][Yas95]

    • Simulation of specific markets, such as “stock market” and “foreign exchange market” [PAH94] [ITT99][IO96]

    • Simulation of the entire economic society such as “Agent-Based Keynesian Economics” and “ASPEN”[Bru97] [NB98]


Agent based simulation of the automotive market l.jpg
Agent-based Simulation of the Automotive Market Automobile Market:

  • An individual-based simulation framework

  • “Agent” means “actor” or “individual” in the artificial market; market consists of a lot of agents

  • Four types of agents: Manufacturers, Dealers, Lenders, and Consumers

  • Each agent group has its unique view of the market and a set of behavioral rules with common parameters

  • Agents interact through retail purchase/finance transactions or inventory replenishment order fulfillment transactions


Agent interactions in the market l.jpg
Agent Interactions in the Market Automobile Market:

Manufacturers

Incentive subsidy

Payments

Vehicles

Dealers

Captive Lenders

Incentives

Payments

Vehicles

Incentives

Loan/Lease

Consumers


Consumer agents l.jpg
Consumer Agents Automobile Market:

  • Consumers arrive at the market each week following a Poisson distribution

  • Individual consumers are “generated” based on a pre-determined distribution of age, gender, income, etc.

  • Each consumer selects and purchases a vehicle offered in the “market” in a week and then leaves the “market”

  • The probability for a vehicle brand to be chosen by a consumer is proportional to the relative utility of that brand, which is also a function of the demographic profile of that consumer


Consumers decision rules l.jpg

Measures consumers’ Automobile Market:

satisfaction about a new

vehicle’s styling, engine,

ride, comfort, seats, sound,

cockpit, and HVAC

J.D. Power & Associates’

Automotive Performance,

Execution, And Layout Index

Initial Quality Survey

Measuring Things-Gone-

Wrong per 100 vehicles

Vehicle Dependability

Index - Measuring Things-

Gone-Wrong for 4-5 years old vehicles

1 if trade-in vehicle has the

same make as the purchase

vehicle and not the same model;

0 otherwise

1 if trade-in vehicle is the

same model as the purchase

vehicle; 0 otherwise

Consumers’ Decision Rules

A consumer of type h selects a vehicle brand i with probability


Estimation of random utility coefficients l.jpg
Estimation of Random Utility Coefficients Automobile Market:

  • Based on point-of-sale retail transaction data collected by J.D. Power & Associates

    • Only one transaction per household

    • A total of 122,546 transactions during 1997-2000 for the California market

    • A total of seven vehicles in the Upper Middle car segment

  • Disaggregate Multinomial logit choice model


Manufacturer agents m agents l.jpg
Manufacturer Agents (M-Agents) Automobile Market:

  • M-Agents’ parameters of interest

    • Sales Volume and Market Share

    • Inventory (Days-of-Supply or DOS)

    • Prices, Revenue, Costs, and Profits

  • M-Agents’ Decision Rules

    • Pricing (annually)

    • Production volume (weekly)

    • Incentives (weekly)

  • M-Agents used in simulation

    • Honda, Toyota, Buick, Chevrolet, Dodge, Nissan, Ford


Dealer agents d agents l.jpg
Dealer Agents (D-Agents) Automobile Market:

  • D-Agents represent franchised dealers selling vehicles of a particular brand

  • D-Agents’ parameters of interest

    • Vehicle inventory (Days-of-Supply)

    • Vehicle transaction prices and sale volume

    • Vehicle replenishment orders

    • Revenue, costs, and profits

  • One D-Agent generated for each M-Agent



Market dynamics market shares l.jpg
Market Dynamics: Market Shares Automobile Market:



Vehicle apeal scores l.jpg
Vehicle APEAL Scores Automobile Market:

* Lumina was replaced by Impala for 2000 model year


Apeal elasticity l.jpg
APEAL Elasticity Automobile Market:

  • Effects on market share percent change with a 1% improvement

  • in APEAL scores


Vehicle vdi scores l.jpg
Vehicle VDI Scores Automobile Market:


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VDI Elasticity Automobile Market:

  • Effects on market share percentage change with a 1%

  • improvement in VDI scores


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Simulation to Assess the Effects of APEAL Improvement Automobile Market:

Case 2: Both Accord’s and Taurus’ APEAL improve by 1%

Case 3: Accord’s APEAL

improve by 1%

Case 1: Taurus’ APEAL

improve by 1%

Case 0: Base


Detailed market share changes l.jpg
Detailed Market Share Changes Automobile Market:


Results of simulation apeal l.jpg
Results of Simulation (APEAL) Automobile Market:

Case 2: Both Accord’s and Taurus’ APEAL improve by 1%

Taurus: +0.21ppt

Accord: +0.90ppt

Case 3: Accord’s APEAL

improve by 1%

Taurus: -0.06ppt

Accord: +0.93ppt

Case 1: Taurus’ APEAL

improve by 1%

Taurus: +0.41ppt

Accord: -0.17ppt

Case 0: Base

Taurus: 6.9%

Accord: 41.2%


Summary l.jpg
Summary Automobile Market:

  • An agent-based market simulation framework for the assessment of Manufacturers’ long term quality decisions

  • Consumer agents’ behavior is governed by the results of a disaggregate MNL consumer demand model

  • Manufacturer, Lender, and Dealer agents make tactical marketing decisions on a weekly basis based on a set of parameterized production rules for potential self-learning

  • Major results include market share elasticity with respect to vehicle design and quality


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Summary (cont’d) Automobile Market:

  • APEAL (representing perceived styling and functionality) has dominant effects on market share changes of vehicles

  • VDI (representing perceived vehicle quality, durability, and reliability based on previous ownership experience or word-of-mouth) has significant effects on market share changes

  • A pricing leverage can be determined for each quality improvement by controlling the same market share as before