A Summary of Cubbin and Geroski

This article examines the nature of short-run dynamics in judging the profitability in the marketplace. The authors state that the dynamics of net income in the inter-industry averages, even among companies in the same industry, can be extremely variable.That is, although it is assumed that there is some homogeneity that can permit comparison between company net within and industry that can then be used to create an inter-industry average, this homogeneity does non, in fact, exist.It is apparent that this soiled assumption has its roots in the divided up asset theory of profit determination posited by Porter (1979) as a method of determining performance in an industry (Cubbin & Geroski, 1987, p. 427). The authors state that the flaw comes from assuming that the intra-industry variations in profits are small and uncorrelated with market structure (Cubbin & Geroski, 1987, p. 427), which, if this assumption is untrue, the industry-level analysis of the dynamics between companies is no longer of worry and is no longer of any value.In addition, Porters model seems to have failed to hold back into account the differences that exist between the industry leadership and the industry pursual in terms of profitability and how that profit is made.The literature review for Cubbin and Geroski (1987) suggests that analysis of different industries show that market power gains are unevenly distributed between these leaders (the large firms) and followers (the small firms) in these industries and that the markets share that this power reflects is important in determining the relative profitability between companies (pp. 427-428).The authors indicate, however, that there are several(prenominal) assessment methods in terms of determining any private organizations profitability both on firm specific and industry-wide factors. These factors includeCo-efficients on variables, such as market share and industry concentration.An analysis of variance (ANOVA) framework that deco nstructs performance variables into effects created by industry, firm, and market share.A dynamic model, which the authors suggest that a co-variance might exist between profit paths across intra-industry firms (Cubbin & Geroski, 1987, p. 428).The authors state their intent at this juncture indicating that they intend to examine the importance of industry effect on industry profitability in the United Kingdom (Cubbin & Geroski, 1987). It is also at this point in the paper where the authors describe the form that the paper will take, explaining how the discipline will be organized and analyzed.The ModelThe model that the authors examined for the purpose of this paper is that of an individual firm (i) in a single industry (I). The current profit pose for i is then compared for the equilibrium profit rate for I, over a long term.According to the authors, it is unlikely that the comparison of the profit rates for and I will be equal to one another over the period of analysis for one of two reasons 1) that there is no equilibrium in the individual firms profit over the long term, or 2) that the equilibrium profit rate for the individual firm differs from that of the industry as a whole. In addition, the ease or difficulty with which a firm can enter the market and other factors that affect doing business in that industry may have an effect over the rate of equilibrium profit.The authors maintain that the profit rate for the individual is determined by the equilibrium profit rate for the industry and the dynamic forces that generate allowance towards them within and between industries (Cubbin & Geroski, 1987, p. 429).Cubbin and Geroski (1987) go on to explain that one issue in this model is that tracking the factors that go into the dynamic may be unimaginable to measure, in part due to the difficulty in observing them.In addition, the actual entry of a firm into an industry may or may not have an effect overall and may or may not lead to the existing firms in t hat industryparticularly, presumably, the leaders of that industryto make strategical preemptive pricing moves that may effect the performance of the market before the new firm even has time to enter and disturb the equilibrium (Cubbin & Geroski, 1987).The authors purpose a solution to control these variables. They first define entry into an industry as being when 1) new firms enter the industry, 2) expansion of incumbent firms, and 3) as incumbent competitors attempt to block new firms by uniting their production and pricing efforts (Cubbin & Geroski, 1987).This definition was left broad to include all systematic dynamic forces interacting with profits (Cubbin & Geroski, 1987). Entry might then have a strong impact if there are strong dynamic forces however, weak dynamic forces result in the average industry profitability being affected over a long period (Cubbin & Geroski, 1987).If a firm holds a strategic place in the industry and earns profits higher than those earned by other s in the industry, then a response to this position might result in other firms in the industry might encourage mobility in the industry itself, with other new firms entering or incumbents restructuring to diversify (Cubbin & Geroski, 1987), which results in any of these actions having an effect on the individual firm.The basic model that the authors suggest using to analyze industry profits is arrived at after a series of equations that are eventually modified to take compare the vulnerability to the effects of entry on the part of the individual firm against the industry at large (Cubbin & Geroski, 1987), based on the movement created by firm and industry specifics.