Barriers to exit
- Barriers to exit are obstacles to market players who realize
that they will not turn a profit and would like to quit the market.
- The difficulties of exiting a market can force a player to keep
competing as the least bad alternative.
- The increased competition affects negatively the other incumbents.
- Incumbents' profits are potentially lower than in a truly competitive
market, to the advantage of buyers.
The most important barrier to exit is the lack of alternative,
more profitable use of the assets in which the business has already
invested.
The costs of producing a product or service can be roughly split
into fixed and variable costs.
- Fixed costs represent the up front investment in machinery and
other assets needed to produce the product or service.
- Variable costs represent the additional per unit costs, labor
and material.
From an economic perspective, it makes sense to produce and sell
an additional unit of product or service if the revenue generated
covers at least for the variable costs. What is left beyond covering
variable costs is a contribution to reduce the loss on the assets. |
Examples
Industries with high barriers to exit:
- Wireless Telecom: the production of an additional minute of
wireless call costs virtually nothing, most costs being up front
investment in expensive equipment deployment.
- Air Travel: adding a passenger to a scheduled airplane cost
just a little bit of kerosene, as opposed to the huge cost of
idle airplanes.
Industries with low barriers to exit:
- Retail: inventory can be moved to more profitable markets or
liquidated.
- Personal care services: labor is the most important price factor
for these services.
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