Examples of Barriers to Entry or Exit in a Company

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When a company decides to enter a market, it determines how easy entering will be and how difficult leaving will be. If a market is easy to enter, many competitors will enter all the time, so the market will have strong competition. If a market is difficult for a company to leave, this also increases competition, because the company may have to take a loss to exit.

Patents

A major entry barrier is patent protection. If a drug company has the right to manufacture a drug for the next 20 years, no other company can make the same drug, so another company has to research and manufacture a drug with similar effects. If research and testing costs are very high, the market has a strong entry barrier.

Equipment Purchase

Another entry barrier is equipment costs. An electric company has to install power lines that connect its generator to each resident and business. An auto maker must build factories to produce its cars. This barrier is weaker when a company can use another firm's infrastructure, such as reselling power on another utility's network, or the company can import products from a location where equipment is cheaper.

Regulations

Government regulations can create an exit barrier. A state may give an electric company a local monopoly in exchange for a promise to provide power for several decades. The Community Reinvestment Act requires a bank to offer mortgage loans in a location if it has retail branches that accept deposits from customers in that location.

Equipment Sale

When an industry requires the company to invest in special production equipment, this is also an exit barrier. If a farmer decides to sell his farm, he has equipment such as tractors and harvesters that are most useful to another farmer. If there is a drought or a crop blight in the area and other farmers are also trying to leave the industry, no farmer will want to buy the equipment.

Existing Contracts

The company's own contracts can establish an exit barrier. If the company promises to supply materials to another company for an advance payment, it has to keep supplying materials unless it can pay another company to take on this obligation. If the company offers warranties, it must fix and replace its customers' broken equipment, so it has to keep making more of its products.

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