Maximizing Profits: Contract Out or DIY?

(Photo: davidd)

We did a kayak/hike/swim tour with Kayak Wailua in Kauai, Hawaii, mainly because our guidebook said it was as good as other tours and less expensive. I think the book was correct, so I asked the guide: “How do you guys charge a lower price and still survive?”

He answered that they are larger (because they have more permits for river trips), enabling the owner to do his own booking directly, thus saving expenses. Fine, but implicitly the opportunity cost of his time must be less than the cost of contracting out, or he is not profit-maximizing. If he is profit-maximizing, then implicitly he has taken advantage of economies of scale in this “industry,” while his competitors haven’t. If that is so, I would expect some consolidation among his competitors as they understand the shape of long-run average costs. (HT: KY)