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Concept
Barriers to exit
Summary
In economics, barriers to exit are obstacles in the path of a firm that wants to leave a given market or industrial sector. These obstacles often have associated costs, prohibiting the firm from leaving the market. If the barriers of exit are significant, a firm may be forced to continue competing in a market. This forced stay in the market occurs when the costs of leaving a market are higher than costs incurred by continuing in the market. Sometimes, when firms operate at low profit or at loss, they still choose to compete with others. Major factors of this decision making is high barriers to exit.
There are various definitions of "barrier to exit", this means the absence of one common approach to define barriers to exit.
In 1976, Porter defines "exit barriers" as "adverse structural, strategic and managerial factors that keep firms in business even when they earn low or negative returns.”
In 1989, Gilbert used the definition “costs or forgone profits that a firm must bear if it leaves the industry...Exit barriers exist if a firm cannot move its capital into another activity and earn at least as large a return”. Direct costs of exit and indirect opportunity costs of exit are covered in this definition.
In 2021, Will Kenton gives a very clear definition which states, "Barriers to exit are obstacles or impediments that prevent a company from exiting a market in which it is considering cessation of operations, or from which it wishes to separate." Kenton mentions how "Barriers to exit can be compared with barriers to entry."
All of the above definitions describe barriers to exit as obstacles that may force a firm to continue operating in a market or a consumer to continue using a firm.
There is a variety of factors that can affect the ease of exit. Type of barriers to exit can mainly divided into direct exit costs and indirect opportunity costs of exit.
Direct exit costs:
Labor related exit costs. Costs related to protect employees’ contractual rights for example, staff redundancy costs and insurance benefits.
Official source
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