Barriers to Exit

Barriers to exit are obstructions that hinder a business from exiting a market. The firm may consider the existence of these barriers when initially deciding whether to enter a market, which could cause it to never enter the market at all. Several examples of barriers to exit are:

  • A local government requires a business to stay in the market, because its goods or services are considered to be for the benefit of the public. For example, an airline may be required to keep servicing a small local community, even though there are few customers in the area.

  • A firm has invested a significant amount in the market, which it will lose if it exits the market. This is a sunk cost, so it should have no bearing on management's decision to leave the market, and yet it is commonly included in the decision.

  • Massive closure costs would be incurred as part of the exiting process. For example, a mining firm would have to spend large amounts for environmental remediation when it closes an open pit mine. Or, the government may mandate that significant payments be made to any employees whose employment would be terminated as the result of a facility closing down.

When there are barriers to exit, a company is more likely to continue offering goods or services, even though it may be losing money or making only a small profit on each sale transaction. When there are several firms in the same situation, there are too many competitors, so profits are likely to remain low or nonexistent.