barriers to exit


Barriers to Exit

Prohibitive costs associated with leaving a sector or market. For example, if a company operating in several sectors wishes to divest itself of its automotive interests, it may have a difficult time selling permanent assets or laying off workers because of high severance costs. Barriers to exit may discourage a company from divesting, or prevent it altogether. Barriers to exit are most common in sectors with high fixed costs.

barriers to exit

obstacles in the way of a firm contemplating leaving a market which serve to keep the firm in the market despite falling sales and profitability. There are a number of potential exit barriers including:
  1. whether the firm owns the assets used to make the product, or leases them;
  2. the age of the firm's assets used to serve the particular market and the extent to which they have been depreciated. Where DEPRECIATION charges on old assets are low then operating costs will be lower, and this may encourage the firm to remain in the market despite low prices. On the other hand, with fully-depreciated assets the firm would suffer little capital loss in writing off these assets and exiting the market;
  3. the nature of the firm's assets. Specifically, if the assets are special purpose and so difficult to redeploy to other uses;
  4. the extent to which the firm's plant and equipment is re-saleable in second-hand markets;
  5. whether the firm needs to make any additional investment in order to remain competitive;
  6. the extent of market excess capacity, and thus related price and profit levels;
  7. the extent of shared production and distribution facilities. For example, where a multiproduct firm's plant produces a number of different products rather than just one, then a decision to drop one product could affect the cost and availability of other products;
  8. the extent of VERTICAL INTEGRATION. A vertically-integrated petrochemical firm, for example, may find it difficult to drop one product without affecting downstream operations which use that product as a raw material, or upstream operations which rely upon the product as a use for their intermediate material;
  9. the spread of a firm's product range. A single product firm would be reluctant to cease making its product, for then the firm would cease trading, whilst a diversified firm would find it easier to exit from one particular market since it has many others available. See DIVERSIFICATION.

Barriers to exit determine the ease with which firms can leave declining markets, and thus affect both the profitability of firms and the smooth functioning of markets. See BUSINESS STRATEGY, ENDGAME STRATEGY, PRODUCT LIFE CYCLE, MARKET SYSTEM.

barriers to exit

elements of MARKET STRUCTURE that refer to obstacles in the way of a firm contemplating leaving a MARKET which serve to keep the firm in the market despite falling sales and profitability. Exit barriers include: whether the firm owns the assets it uses or leases them; whether assets are special-purpose or can be redeployed to other uses; whether assets are resaleable in second-hand markets; the extent of market excess capacity and the extent of shared production and distribution facilities. Barriers to exit determine the ease with which firms can leave declining markets and thus affect both the profitability of firms and the smooth functioning of markets.

Exit barriers can limit the incentives for a firm to leave a market even when the returns from producing are less than the potential earnings from the company's assets in their next best alternative use. Exit barriers arise when a firm has contractual obligations that it must meet whether or not it ceases production: for example, long-term contracts to purchase raw materials and components; or large redundancy pay obligations; or the presence of specific assets (see ASSET SPECIFICITY). See PRODUCT LIFE CYCLE, PRICE SYSTEM, CONTESTABLE MARKET.