What Are Exit Barriers?

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The term "exit barrier" refers to an obstacle or other condition potentially stopping a business from leaving a market or industrial sector. These barriers imply a high cost of leaving the market or relocating, despite the reasons for doing so, which typically include incentives like high levels of competition and low-profit margins. Exit barriers may sometimes be high enough to force continued operation in a disadvantageous market because the price of leaving is higher than staying.

Fixed Assets

  • Certain markets imply a high level of investment in fixed assets that cannot be readily moved or liquidated favorably. Typically, certain services like manufacturing face this type of exit barrier disproportionately. Manufacturers typically have specialized equipment and facilities as part of their operation, while service providers such as telecommunications firms have invested heavily in wiring, deploying equipment and preparing infrastructure. Liquidating manufacturing equipment and facilities is difficult, more so in a specialized industry, while service providers may find it far cheaper to continue providing services for some return on their high initial investment in their fixed or semi-permanent assets.

Low Variable Costs

  • Often, high initial investments correlate with lower variable costs, which are the per unit inputs required to manufacture or provide another unit of product. This dissuades sellers from divesting from the market due to the high initial investment as well as the relatively low cost of continuing to do business. Variable costs also can be used as an incentive to remain in the market, or to deter potential competitors from entering the market due to their mutability and the existed sellers' ability to manipulate final prices to make competitors' products less competitive.

High Immediate Costs

  • Many industries are based on long-term contractual obligations between sellers and buyers, as well as between the sellers and their employees. These businesses often face high immediate costs to any sort of divestment from a market or even a downsizing. These costs come from a variety of sources such as the cost of laying off workers and providing severance packages, the cost of breaking contracts with suppliers and buyers, as well as costs related to facilities and equipment.

Other Barriers

  • Businesses may face other exit barriers, generally tangentially related to immediate costs of divestment or loss of fixed assets. These may include contractual stipulations, usually based on long-term contractual obligations with suppliers, buyers or landlords. Generally, these contracts enforce a penalty for breach of contract and act as major deterrents for sudden divestment from a market. Some firms may also intentionally raise exit barriers for themselves to either shake out competitors -- generally newer firms -- or to communicate a commitment to stay in a market for the long term. Sometimes, an impending anticipated market upturn may also influence firms to remain in an unfavorable market.

References

  • Photo Credit Thomas Northcut/Photodisc/Getty Images Comstock Images/Comstock/Getty Images
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