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Dynamic Discrete Choice Models:

an application to vehicle holding decisions


Cinzia Cirillo
University of Maryland
A. James Clark School of Engineering
Department of Civil and Environmental Engineering
Universita’ Roma tre
July 2nd, 2012
Travel Mode

National Energy
Infrastructure Consumption

Trade Vehicle Air Pollution


Balance Ownership Emissions

Battery Greenhouse
Production Gas
and Waste Emissions

Automobile
Industry

2
Problem
• What effect will the following factors have on
the vehicle marketplace over the next five
years:
– New vehicle technology
– Improvements in existing vehicle technology
– Greater availability of different energy sources
– Rising fuel prices
– Transportation and energy policy

3
Objectives
• Collect data on future household vehicle
preferences in Maryland in relation to vehicle
technology, fuel type, and public policy
• Determine if respondent could make dynamic
vehicle purchase decisions in a hypothetical
short- to medium-term period
• Determine if results from this hypothetical
survey could be modeled using discrete
choice methods

4
Definitions
• BEV – battery electric vehicle, a vehicle which stores electricity in
batteries as its only source of energy
• HEV – hybrid electric vehicle, a vehicle which runs on gasoline but
uses larger batteries to aid in the propulsion of the vehicle
• PHEV – plug-in hybrid electric vehicle, a vehicle which stores
electricity from the power grid in batteries and includes a gasoline
engine
• AFV – alternative fuel vehicle, a vehicle with an internal
combustion engine that runs on a liquid fuel that is not gasoline or
diesel (e.g. ethanol)
• FFV – flex-fuel vehicle, a vehicle which can run on both gasoline
and an alternative fuel
• MPGe – miles per gallon gasoline equivalent, a measure of the
average distance traveled per unit of energy in one US gallon of
gasoline

5
Literature Review
• Bunch et al. (1993)
– Conducted Stated Preference (SP) survey in California
– Vehicle Choice with two versions
• New Gasoline, Alternative Fuel, Flex-fuel or Electric
– Fuel Choice
• Given a flex-fuel vehicle: choose a fuel
– MNL and nested logit models
• Kurani, Turrentine, Sperling (1996)
– SP with reflexive designs
– New Gasoline, CNG, HEV, 2 different highway-capable BEVs,
and Neighborhood BEV
– Hybrid Household Hypothesis (Multi-car households more likely
to own BEVs)
– Only analyzes with possible hybrid households

6
Literature Review
• De Vlieger et al. (2005)
– SP survey with MNL and nested logit models
– Choice set: Gasoline, Diesel, AFV, BEV, Hydrogen
Fuel Cell Vehicle
• Musti and Kockelman (2011)
– Choice set: 12 vehicle alternatives of varying size
and technology (Conventional, HEV, PHEV)
– SP survey with MNL Model
– Included a simulation over a 25-year period

7
Literature Review
• Brownstone and Train (1999)
– Used mixed logit and probit models to estimate
preference among gasoline, electric, methanol,
and CNG vehicles
– Able to create substitution patterns that more
closely resemble real-life expectations
• Bolduc et al. (2008)
– Integrated Choice and Latent Variable Model
(Hybrid Choice Model)

8
Survey Methodology
Time Frame Summer – Fall 2010
Target Population Suburban and Urban Maryland Households
Sampling Frame Households with internet access in 5 Maryland counties
Sample Design Multi-stage cluster design by county and zipcode
Use of Interviewer Self-administered
Mode of Administration Self-administered via the computer and internet for
remaining respondents
Computer Assistance Computer-assisted self interview (CASI) and web-based
survey
Reporting Unit One person age 18 or older per household reports for the
entire household
Time Dimension Cross-sectional survey with hypothetical longitudinal
stated preference experiments
Frequency One two-month phase of collecting responses
Levels of Observation Household, vehicle, person

9
Survey Sections
• Household Characteristics
• Current Vehicles
• Stated Preference Experiments
– Vehicle Technology
– Fuel Type
– Taxation Policy

10
Experiment Directions
• Make realistic decisions. Act as if you were actually buying
a vehicle in a real life purchasing situation.
• Take into account the situations presented during the
scenarios. If you would not normally consider buying a
vehicle, then do not. But if the situation presented would
make you reconsider in real life, then take them into
account.
• Assume that you maintain your current living situation
with moderate increases in income from year to year.
• Each scenario is independent from one another. Do not
take into account the decisions you made in former
scenarios. For example, if you purchase a vehicle in 2011,
then in the next scenario forget about the new vehicle and
just assume you have your current real life vehicle.

11
Vehicle Technology Experiment

12
Fuel Type Experiment

13
Taxation Policy Experiment

14
Contributions
• Dynamic Attributes
– Attribute change from year to year
• (e.g. EV price falls then raises, MPG increases annually)
• Time of Purchase
– Given two scenarios per year from 2010 -2015
• Choice Set
– Includes “Keeping Current Vehicle”
– If purchase new vehicle, can keep or sell current vehicle
– Does not exclude models
• Respondents
– Includes respondents who don’t plan to purchase a
vehicle in next five years

15
Results – Descriptive Statistics
• Gender: 52% male
• Age: 41 years (median), 43 years (mean)
• Education: 76% with Bachelor degree or higher
• Income: $50k – $75k (median), 22% with incomes
above $150k
• Vehicle Ownership: 1.9 (average), 2.0 (median)
• Primary Vehicle Age: 6.4 years (average), 6.0 years
(median)
• Primary Vehicle Price: $23,763 (average, new),
$11,367 (average, used)
• Intend to Purchase Vehicle within Five Years: 62%

16
Results - Vehicle Technology
Vehicle Price vs Adoption Rate
25% 40000

35000
20%
30000

25000
15%
Adoption Rate

Vehicle Price
20000

10%
15000

10000
5%
5000

0% 0
2010 2011 2012 2013 2014 2015

New gasoline New Hybrid New Electric Gasoline Price Hybrid Price Electric Price

17
Results – Fuel Technology
Fuel Price vs Adoption Rate
30% 7

6
25%

Price per Gallon (or Equivalent)


5
20%
Adoption Rate

4
15%
3

10%
2

5%
1

0% 0
2010 2011 2012 2013 2014 2015

New Gasoline New Alternative Fuel New Electric New Plug-In Hybrid
Gasoline Price Alternative Fuel Price Electricity Price

18
Results – Taxation Policy
VMT Tax vs Adoption Rate
35% 80

30% 70

60
25%

VMT Tax ($/1000 miles)


50
Adoption Rate

20%
40
15%
30

10%
20

5% 10

0% 0
2010 2011 2012 2013 2014 2015

Drive Current Vehicle Less New Gasoline New Hybrid New Electric
Current Vehicle VMT Gasoline VMT Hybrid VMT Electric VMT

19
Model
• Utility Function with Random Parameters and
Error Components

• Choice Probability for Mixed Logit with Panel


Data

20
Results – Vehicle Technology
Included in Utility

Gasoline
Current

HEV

BEV
Coefficient Value T-stat
ASC – New Gasoline Vehicle  -1.320 -3.28
ASC – New Hybrid Vehicle  -1.760 -2.93
ASC – New Electric Vehicle  -3.450 -5.70
Purchase Price [$10,000]    -0.639 -5.42
Fuel Economy Change [MPG] (current veh. MPG known)   0.039 2.68
Fuel Economy Change [MPG] (current veh. MPG unknown)   -0.002 -0.21
Recharging Range [100 miles]  0.909 4.37
Current Vehicle Age – Purchased New [yrs]  -0.123 -4.34
Current Vehicle Age – Purchased Used [yrs]  -0.059 -2.02
Minivan Dummy interacted with Family Households  1.410 2.75
SUV Dummy interacted with Family Households  1.900 4.77
Non-Electric Vehicle Error Component (standard deviation)    2.400 6.00
Non-Hybrid Vehicle Error Component (standard deviation)    2.150 6.71
Vehicle Size (mean)     -0.435 -2.42
Vehicle Size (standard deviation)     1.09 6.61

Likelihood with Zero Coefficients -1379.4 "Rho-Squared" 0.406


Likelihood with Constants Only -1088.1 Adjusted "Rho-Squared" 0.395
Final Value of Likelihood -819.6 Number of Observations 995 (83)

21
Results – Vehicle Technology
• Gasoline and hybrid vehicles have a similar inherent
preference
• Families influenced by vehicle size
• Fuel economy not significant for respondents who did
not know their own vehicle’s fuel economy
• Covariance between Vehicle Types
– current vehicle + new gasoline vehicle (largest cov.)
– new gasoline or current vehicle + new hybrid vehicle
– new gasoline or current vehicle + new electric vehicle
– new hybrid vehicle + new electric vehicle (smallest cov.)
• About 65% of respondents preferred smaller vehicles

22
Results – Fuel Type
Included in Utility

Gasoline
Current

Diesel

PHEV
AFV

BEV
Coefficient Value T-stat
ASC – New Gasoline Vehicle  -8.810 -6.81
ASC – New Alternative Fuel Vehicle  -9.940 -7.66
ASC – New Diesel Vehicle  -10.300 -7.84
ASC – New Battery Electric Vehicle  -9.230 -4.07
ASC – New Plug-in Hybrid Electric Vehicle  -10.100 -4.79
Fuel Price [$]     -1.160 -7.79
Gasoline Price – PHEV [$]  -0.358 -2.02
Electricity Price – BEV [$]  -0.762 -3.02
Electricity Price – PHEV [$]  -0.569 -2.79
Charge Time – BEV [hrs]  -0.917 -3.68
Charge Time – PHEV [hrs]  -0.164 -0.87
Average Fuel Economy [MPG, MPGe]      0.039 3.91
Current Vehicle Age – Purchased New [yrs]  -0.395 -4.21
Current Vehicle Age – Purchased Used [yrs]  -0.377 -3.86
Current Vehicle Error Component (standard deviation)  2.290 3.90
Electric Vehicle Error Component (standard deviation)   2.300 3.92
Liquid Fuel Vehicle Error Component (standard deviation)    3.460 4.91

Likelihood with Zero Coefficients -901.3 "Rho-Squared" 0.508


Likelihood with Constants Only -667.7 Adjusted "Rho-Squared" 0.489
Final Value of Likelihood -443.6 Number of Observations 503 (42) 23
Results – Fuel Type
• Respondents less sensitive to electricity price
– Maybe lack of familiarity, no rule of thumb?
• Charging time has influence on attractiveness
of BEVs but not PHEVs
• Error components shows that groups of
respondents may have similar propensity
towards electric vehicles (BEV and PHEV) and
between liquid fuel vehicles

24
Results – Taxation Policy
Included in Utility

Gasoline
Current

HEV

BEV
Coefficient Value T-stat
ASC – New Gasoline Vehicle  -7.170 -6.03
ASC – New Hybrid Vehicle  -7.090 -5.94
ASC – New Electric Vehicle  -7.590 -6.17
Hybrid Vehicle Deduction [$] divided by HH Income [$1000]  0.093 2.71
Electric Vehicle Deduction [$] divided by HH Income [$1000]  0.245 2.02
VMT Tax interacted with Annual Mileage [$100]     -0.186 -5.14
Toll Discount [%] (for HHs near toll facilities)   0.065 2.76
Toll Discount [%] (for HHs not near toll facilities)   0.005 0.75
Current Vehicle Age (new) interacted with Annual Mileage -0.049 -5.24
[years x 1000 miles] 
Current Vehicle Age (used) interacted with Annual Mileage -0.026 -2.47
[years x 1000 miles] 
New Vehicle Error Component (standard deviation)    3.760 4.90
Current Vehicle Error Component (fixed to 0)  0.000 Fixed

Likelihood with Zero Coefficients -565.6 "Rho-Squared" 0.455


Likelihood with Constants Only -456.7 Adjusted "Rho-Squared" 0.436
Final Value of Likelihood -308.1 Number of Observations 408 (34)

25
Results – Taxation Policy
• ASCs similar to Vehicle Technology
Experiment
• Toll discount only significant for residents
near toll facilities
• Higher VMT tax for gasoline vehicles
dissuaded new gasoline vehicle purchases

26
Depreciation of new and old vehicles
• Respondent’s vehicle depreciation was obtained by dividing
the coefficient of vehicle age (new or used) by the coefficient
of purchase price.
• The models found that respondents depreciated their current
vehicle at a rate between $1,950 and $1,310 per year for
vehicles purchased new.
• For respondents with used vehicles, depreciation was
between $1,066 and $710 per year.
• The MNL model placed greater depreciation on both new and
used vehicles than the mixed models.

27
Survey Redesign
• Eliminate the taxation policy experiment
– Incorporate VMT tax into fuel type experiment
– Incorporate Rebates into vehicle technology
experiment
• Added open-ended questions for purchase
reason of current vehicles
– Able to elicit some opinions about vehicle
preferences, attitudes, and concerns
• All respondents participate in both choice
experiments

28
Survey Redesign
• Vehicle Technology Experiment
– Incorporate MPGe into vehicle technology
experiment
• Respondents able to compare mpge and mpg in fuel
technology experiment well
– Added fees and rebates for different vehicle types
– Added Plug-in Hybrid Vehicle (PHEV) alternative
• Fuel Technology Experiment
– Removed diesel vehicle option, added flex-fuel
vehicle option
– Added VMT tax depending on fuel type

29
Primary Vehicle Purchase Reasons
• Preference for:
– Fuel Economy
– Family Vehicle / Transporting Passengers
– Low Maintenance, High Reliability
– Personal Appeal
– Comfort and Safety

30
Secondary Vehicle Purchase Reason
• Preference for:
– Fuel Economy
– Vehicle Cost or Value
– Family Vehicle
– Cargo Capacity
– Low Maintenance, High Reliability

31
Dynamic Discrete Choice Models
for Transportation
Part II
Background
• Discrete choice models are commonly used in transportation
planning and modeling, but their theoretical basis and
applications have been mainly developed in a static context.

• With the continuous and rapid changes in modern societies


(i.e. introduction of advanced technologies, aggressive
marketing strategies and innovative policies) it is more and
more recognized by researchers in various disciplines that
choice situations take place in a dynamic environment and
that strong interdependencies exist among decisions made at
different points in time.

33
Dynamics models in economics
• Dynamic discrete choice models have been firstly developed
in economics and related fields.
• In dynamic discrete choice structural models, agents are
forward looking and maximize expected inter-temporal
payoffs.
• The consumers get to know the rapidly evolving nature of
product attributes within a given period of time and different
products are supposed to be available on the market.
• As a result, a consumer can either decide to buy the product
or to postpone the purchase at each time period. This
dynamic choice behavior has been treated in a series of
different research studies.
34
Review of economics literature
• John Rust (1987) --- bus engine replacement, single agent, two
options, one purchase, homogenous attributes of the products,
infinite-horizon. Nested Fixed Point method to estimate.
• Oleg Melnikov (2000) --- printer machine demand one purchase,
differentiated durable products, homogenous consumers.
• Szabolcs LŐrincz (2005) --- computer servers demand, persistency
effects, choice between using the original product and upgrading
its format (operating systems). Dynamic nested logit model.
• Juan Esteban Carranza (2006) --- digital camera demand,
heterogeneity over consumers’ preferences and dynamics of
quality.
• Gowrisankaran and Rysman (2007) --- digital camcorder, repeat
purchases, heterogeneous consumers and differentiated products.

35
Model formulation
Dynamic, regenerative, optimal stopping problem
Consumer i state at time t
0 if i is in the market;
Sit  0,1 
1 otherwise.

In each time period consumer i in status Sit  0 has two options:


(a) to buy one of the products j  t or
(b) to postpone

If (a) the consumer i obtains a terminal payoff uijt


If (b) is chosen the consumer obtains a one period payoff cit .
One period pay off

c( xit , qit ;i , i )


xit , a vector of attributes for i at t, e.g. gender, education,
professional status, income.
qit , a vector of characteristics of current vehicle owned by
i, e.g. age, mileage, purchase price, etc.
i ,  i , are parameters for xit and qit .
Terminal payoff
u  u  x , d , y , ,  ,  ,  
ijt it j jt i i i ijt

xit is a vector of individual attributes (e.g. age, income,


education) and  i is the related parameter;
d j is a vector of vehicle static attributes (e.g. vehicle
size) and  i is the related parameter;
y jt is a vector of dynamic attributes (e.g. energy cost per
mile, purchase cost, environment incentives) , i is the
related parameter ;
 ijt is a random utility component (i.i.d. GEV)
u jt   jt   jt

 jt is the mean utility.


Each time period, the consumer decides to buy or postpone

 
D  vit , cit   max vit , cit   E  D  vi ,t 1 
where:
Hypothesis vt  max u jt
jt
cit is the payoff when postponing
 is time period when consumer decides to buy (set 1)
Et 
  E | I t  expected utility

(Based on Bellman equation):


  1 k t 
Dui1t ,...uiJt , cit   max   cit    t Et max uij 
where:

 k t
jJ

 is time period when consumer decides to buy
Industry evolution
The evolution of the industry is represented by a so called
random walk; dynamic variable y jt is supposed to follow a
normal diffusion process, specified as a random walk with drift
j
y j ,t 1  ( y jt )  L( y jt ) j ,t 1
  j y jt   j  L( y jt ) j ,t 1

 jt (j=1,…,J, t = 1,…,T) are i.i.d. multivariate standard normal


random vectors.
L is the Cholesky factor of the variance-covariance matrix
L( y jt ) L( y jt )T  ( y jt )
Utility formulation
Equation (1) becomes:


D  vit , cit   max vit , cit   E[ D  vi ,t 1 ( yt 1 , ci ,t 1 )  | yt ]
This is standard optimal stopping problem. The stopping
set is given when:

T ( yjt)  vit | vit  cit  ED | yt 

Reservation utility
W  yt   cit   E[ D  vi ,t 1 ( yt 1 , ci ,t 1 )  | yt ]
Here,
yt  ( y1t ,... yJt )
Demand structure
Probability of postponing until next period:

i 0t  yt   P vit  W  yt   P  postpone | sit  0, yt   F W  yt  , yt 

Product adoption rate:

h  yt   P buy | sit  0, yt   1  ot  yt 

ijt  y jt   P U ijt  U ikt  k  j uijt  W  yit 


 
exp( jt )G j (e j1 ,..., e jt )
 h(rt )  
G(e j1 ,..., e jt )
Estimation methodology
The parameters estimation can therefore be formulated as a
traditional maximum likelihood problem:
M T
max LL(h)   ln Pit [decision | sit = 0 ].
h
i 1 t 1

Decisions include: buy a car of type j, not buy a car

Pit  {i 0t , ijt }


Dynamic estimation process
W  yt   cit   E[ D  vi ,t 1 ]

Calculate Calculate
E[ D  vi ,t 1 ] ? W  yt 

 
exp( jt )G j (e j1 ,..., e jt )
(1  i 0t )  j1  jt  i 0t  exp(e ( w( y )r ) )
t it
G(e ,..., e )

Calculate Calculate
 ijt i 0t
Scenario tree
At t=0 W  y0   ci 0   E[D1 ]

t=1 buy Not buy


buy Not buy

E[ D1 ] E[ D1 ] E[ D1 ]  E max vi1 , ci1  E[ D2 ]

t=2
buy Not buy buy Not buy

E[ D2 ] E[ D2 ] E[ D2 ] E[ D2 ] E[ D2 ]  E max vi 2 , ci 2  E[ D3 ]

t=3
E[ D3 ]  0
DDCM applied to carownership
• What effect will the following factors have on
the vehicle marketplace over the next five
years:
– New vehicle technology
– Improvements in existing vehicle technology
– Greater availability of different energy sources
– Rising fuel prices
– Transportation and energy policy

46
Static Model- results
Dynamic model -results
Choose electric car price as the dynamic variable
y j ,t 1  0.103  y jt  2.617  N (0,1.78)
UNIVERSITY OF MARYLAND DEPARTMENT OF CIVIL & ENVIRONMENTAL ENGINEERING

Application – market share forecasting


Market shares - comparison

Gas car Hybrid car

Electric car Current car


Conclusions
• New gasoline vehicles, hybrid and electric vehicles occupy
smaller market shares (around 10% each) at the end of the five
year period;
• All new typologies become more popular after the fifth time
period;
• Static models are incapable of recovering peaks in the demand
function;
• MNL model underestimates the market share of the "not buy", and
dramatically overestimate the share occupied by electric vehicles
in the next five years;
• Dynamic model overestimates the market share of the "not buy",
but is capable to reproduce the descending trend for this
alternative.
Future work
• More than one dynamic attributes could be included in the
utility specification; this is not trivial since multivariate
random walks should be estimated and included in model
estimation;
• Individual’s perspective scenarios could be extended to
more than two;
• Data collection techniques should be improved to capture
the interdependency among successive observations over
time, and to incorporate random walks into orthogonal
design (for SP data).
• To compare the results from maximum likelihood method
with those from the nested fixed point method;
• Apply dynamic framework to other case: dynamic pricing
for revenue management, route choice behavior under
dynamic tolling, activity scheduling for activity based
analysis…
Acknowledgments
This is joint work with:
• Renting Xu;
• Michael Maness;
• Fabian Bastin.

Thanks to all the students at UMD who


participated to the data collection effort.

53
Q&A

Thank you

54
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