What are 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. Generally, a market is considered to be unattractive when it has high barriers to exit, and so should be avoided.

Characteristics of Barriers to Exit

The key characteristics of barriers to exit are as follows:

High fixed or sunk costs. Costs that cannot be recovered after exiting, such as investments in specialized equipment, facilities, or infrastructure.
Contractual obligations. Long-term contracts or commitments, such as leases, supplier agreements, or employee contracts, that must be honored even if operations cease.
Loss of brand. Exiting a market can harm a company’s brand image or reputation, especially if customers or stakeholders view it as a sign of weakness.
Legal restrictions. Regulations or legal requirements that make it costly or time-consuming to shut down operations.
Employee layoff costs. Severance payments, pension liabilities, and legal obligations to employees can create significant financial barriers.
Strategic interdependence. A business unit may be critical to the operations of other divisions or product lines, making it difficult to discontinue.
Market exit penalties. Financial penalties or fines may be imposed for prematurely terminating contracts or abandoning a market.
Social considerations. Non-economic factors such as loyalty to employees, community pressure, or emotional attachment to the business.
Asset liquidity issues. Difficulty in selling assets or finding buyers for specialized equipment or facilities.
Impact on remaining operations. Exiting a market may affect a company’s overall economies of scale, supplier relationships, or ability to compete in other areas.
Government intervention. Governments may impose restrictions on closing operations to protect jobs or ensure economic stability.

Examples of Barriers to Exit

Several examples of barriers to exit are as follows:

Government requirement. 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.
Sunk cost. 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.
Closure costs. 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, as each one keeps its prices low in order to attract sales.