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For firms which are in a particular business, the barriers to exit refers to obstacles that they face when they find that they are not making sufficiently high profits and would like to move out the business. These arise from the high investments made in fixed assets to start the business and the inability to use the machinery bought for other purposes.
This forces the firms to continue operating as a better choice to taking a loss. In perfectly competitive markets, the barriers to entry work against those who are already in operation and favor the customers. Some examples of industries with high barriers to exit are telecommunication and air travel and examples of those with low barriers to exit include retail and person care.
In business exit barrier means the factors that restrict the choice of a person or a firm to exit from its current line of business or to close down an ongoing business. The exit barriers are closely related to entry barriers, which refer to the factors that restrict the ability of a person or a firm to enter into a new business. Firms like to close down or exit from their existing business and enter new businesses that are more profitable. But the exit and entry barriers make it difficult for them to do so.
The main exit barrier in business is that a firm exiting a business is forced to continue incurring many types of expenses on the facilities and assets used in the business, without getting any benefit in return from these assets. The firm may be forced to continue to incur charges such as depreciation on its assets and interest on capital employed without being able to make use of these in any ways. Further the firm may not be able to sell or dispose off such assets, except at heavy losses. This kind of limitation on alternate use of business assets is described by economists as asset specificity.
Also, the entry barriers, which restrict the ability of firms to enter alternate businesses, discourages them from exiting their current businesses. The entry barriers include legal barriers, regulations, and product differentiation.
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