In economics

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, barriers to exit are obstacles in the path of a firm which wants to leave a given market

Market

A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 or industrial sector. These obstacles often cost the firm financially to leave the market and may prohibit it doing so.

If the barriers of exit are significant; a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if they continue competing in the market.

Types of exit barrier

The factors that may form a barrier to exit include:

• High investment in non-transferable fixed asset
  Fixed asset
  Fixed assets, also known as a non-current asset or as property, plant, and equipment , is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets...
  
  s. This is particularly common for manufacturing
  Manufacturing
  Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
  
   companies that invest heavily in capital equipment which is specific to one task.
• High redundancy
  Layoff
  Layoff , also called redundancy in the UK, is the temporary suspension or permanent termination of employment of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs...
  
   costs. If a company has a large number of employees, employees with high salaries, or contracts with employees which stipulate high redundancy payments, then the firm may face significant cost if it wishes to leave the market.
• Other closure costs. Contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements.
• Potential upturn. Firms may be influenced by the potential of an upturn in their market that may reverse their current financial situation.

Implications

As more firms are forced to stay in a market, competition

Competition

Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 increases within that market. This negatively affects all firms in the market and profits may be lower than in a perfectly competitive market

Perfect competition

In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

.