Barriers to exit
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In economics, barriers to exit are obstacles in the path of a firm which wants to leave a given market or industrial sector. These obstacles often cost the firm financially to leave the market and may prohibit it doing so.
If the barriers of exit are significant; a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if they continue competing in the market.
Types of exit barrier
The factors that may form a barrier to exit include:
- High investment in non-transferable fixed assets. This is particularly common for manufacturing companies that invest heavily in capital equipment which is specific to one task.
- High redundancy costs. If a company has a large number of employees, employees with high salaries, or contracts with employees which stipulate high redundancy payments, then the firm may face significant cost if it wishes to leave the market.
- Other closure costs. Contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements.
- Potential upturn. Firms may be influenced by the potential of an upturn in their market that may reverse their current financial situation.
As more firms are forced to stay in a market, competition increases within that market. This negatively affects all firms in the market and profits may be lower than in a perfectly competitive market.