Cliff Sosin
speaker
323 appearances
1 recordings
1 series
first heard Apr 2025
last heard Apr 2025
Cliff Sosin’s voice in public audio — every appearance, attributed to the second.
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Once you sort of understand everything immediately around that, other changes outside of the, that they're sort of happening, feel less relevant.
Yeah, that'd be a great example, right? So, you know, I, Who knows how people are going to write software in 10 years? For what? For quantum computers? You might have a business today. It's like building a castle on sand. It's just very, very hard to make predictions. But on the other hand, You know, like the cigarette business, right? Like people, nicotine's habit forming.
There's this phenomenon called secondary reinforcers, which is a psychological phenomenon that you can, you know, put into Chachi Petit. I'll explain it to you. And, you know, but basically it makes people incredibly brand loyal to things that like stimulate the reward systems. And then there's also distribution economics.
But that is just not an area where there's a lot of dynamic change happening. It's also not an area where I need to think about 15 different moving parts to sort of have a general sense as to what's going to happen. Of course, the problem with these contained things is that If they're easy to understand, then everyone understands them.
And so, again, investing is this incredibly challenging endeavor where you're dancing on the knife's edge. You're looking for these things that, on the one hand, they're simple to understand so you can understand them. On the other hand, they're challenging to understand so everyone else misses it.
I have in my head a number of different frameworks for how a company can make money over time in a competitive world. And a simple example from microeconomics would be that of a Corno oligopoly. And just for those who maybe forgot their game theory from college, there are... Two broad types of oligopoly in the economics literature. One is Cournot. The other is Bertrand.
The key difference between them is that in a Cournot oligopoly, the competitors choose the quantity of things they're going to sell first. and the price falls out. It's the thing that moves. In a Bertrand oligopoly, the competitors choose the price that they're going to sell at, and then the quantity falls out, and it's the thing that moves.
And this seems like a subtle change, but it results in a pretty big difference in the competitive equilibrium. So in a Bertrand oligopoly that's non-cooperative, that is to say that people aren't figuring out a way to signal and to sort of cooperate.
Then what happens typically if you imagine, like let's say I'm selling cookies at the state fair and there's me and there's another competitor and there's two spots to sell cookies and we both can manufacture all the cookies we want in a truck next to the fair. And let's say people only buy cookies based on price and they're right next to each other and perfect competition, all the rest.
So what happens is, you know, let's say each cookie costs a dollar to make. Well, I start out, maybe I started selling them for $2. I want to make a dollar a cookie. But my competitor realizes that if they charge $1.99, they can get all the sales. And so they charge $1.99 and then I charge $1.98. And before we know it, we're both down to a dollar and we're making no money per cookie.
And that's the equilibrium. That's the non-cooperative equilibrium. We make no money. But now... Let's imagine instead that I had to bring a tray with a fixed number of cookies and I can't make more. Well, what happens is that morning I'm trying to figure out how many cookies I'm going to make. And I ask myself the question, should I make one more cookie?
And if I make one more cookie, it'll have two effects. One is I'll get to send extra cookie and I'll make whatever the profit on the cookies are times that cookie. But the other is it will increase the number of cookies in the market, which will drive down the price of cookies. And this will cause me to sell all of my cookies at a slightly lower price.
And so as I'm making this decision, you can see how there would be a natural maximization point where I maximize profits. Now, in this case, there's two competitors. So when I add an extra cookie to the market, the price for me, I also lower the price for my competitor. I don't internalize the effect on my competitor.
So I end up behaving like a monopolist, but a monopolist who only absorbs half of their price impact in the marketplace. In other words, one who faces more elastic demand. But I still behave like a monopolist, just with one facing more elastic demand. So there's still monopoly profits to be had. So the equilibrium gets worked. We both solve our differential equations at the same time.
We get to an equilibrium. And lo and behold, we both end up making profits. OK, this is all very theoretical. So you start studying the cruise line industry. OK, just to pick an example of an industry, I'm not that. I've never owned a cruise line business, but I've been around it. It turns out that if they want more cruise ships, they can't just snap their fingers and have more cruise ships.
The number of cruise ships for a good long while is essentially fixed. And so what they do is, this is a perfect example of corno oligopoly. The number of cruise ships is fixed in the short to medium term. So they maximize yield, which basically means they're adjusting price. That leads you down a path of, okay, this is a business where
Just from that perspective, there's lots of other things to think about. There's brand, there's distribution, there's a zillion things. But from that perspective, now you have a sense as to how this is a business where there should be some monopoly profits. But what will mediate how much economic profits there are is how many competitors there are, right?
And also how much elasticity of demand there is. And then, of course, other factors. And then, of course, there's also the question of Are you in equilibrium, or did people accidentally bring too few? Let's say you show up at the fair, and you brought your tray of cookies, and it rains. Well, now the price of cookies plunges, and you lose money, right?
Or let's say you show up, and for whatever reason, a famous singer shows up, and there's a gazillion people, and now you sell the cookies at a premium. So are you at equilibrium is another good question. But it turns out that a lot of travel businesses are coronal oligopolies. you know, rental cars, air travel, cruises.
So this is an example of using a mental model that allows you to understand like certain types of businesses in a somewhat systematic way. One of the investments I sort of cut my teeth the most on where I first had a lot of success was in the construction equipment rental business. And that is also It is a Corneau oligopoly.
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