Uncertain demand makes specialized capital unprofitable in-house but profitable via subcontractors

Evidence

Most argued that given the slow-growing and uncertain markets in which their firms operated, it would be impossible to amortize investments in CNC equipment. They were not in a position to continuously operate the equipment for the 12 to 16 hours a day required to achieve a satisfactory return on the investment. Smaller specialists, on the other hand, were in a position to do this, in part because they aggregated demands from multiple clients, and in part because of their greater internal flexibility in terms of shift work and overtime. In short, subcontractors could do it more cheaply. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2491

Categorization

• QUESTION: Why does aggregating demand across clients overcome the amortization problem where a single large firm cannot? Worth tracing the economics of capacity utilization.