What Are Barriers to Exit?

Mary McMahon

Barriers to exit are obstacles that make it difficult to leave a given industry, forcing a company to remain in the market even if it wants to transition to a different market or close altogether. These represent a mobility obstacle that can limit movements within an economy or market. Barriers to exit can also potentially create a barrier to entry, serving as a disincentive to enter a market because of the high costs associated with leaving.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

The act of leaving a market can be expensive; companies may have obligations like rent and payroll to meet, and may not be able to afford closing costs. In addition, a company may have highly unique equipment and personnel that cannot transfer to a new market. It may be difficult to sell complex equipment in a limited market where most companies already have what they need and don’t have a particular desire for used specialty equipment from another company. These fixed assets can create a substantial barrier to exit.

Some companies create their own barriers to exit. This may be a strategic move to warn competitors that a company plans to establish and maintain a foothold in an industry, and does not intend to leave. When market conditions change or a company wants to switch focus, the barriers it has created can result in a problem; a company might be stuck with a special-purpose facility that it cannot sell, for example.

In an industry with barriers to exit, companies can enter a static state in some market conditions. Their inability to leave the market can interfere with market adaptations and may make it more difficult to take advantage of shifts in the business climate. It can also create a situation where stagnant companies weigh down a market because they cannot leave, while newer companies may experience barriers to entry created by those companies. The existence of large numbers of established firms in an industry can make it hard to break in.

Approaches to dealing with barriers to exit are variable. In some regions, firms work on measures like adaptable factories and equipment that can be repurposed for other uses. If a car company decides to stop making a given model, for instance, the machines used in its production can be sold or moved to a different production line. Regulatory limits may also be changed through lobbying and new legislative proposals, to make it easier for companies to transition between industries and markets.

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