How is profitability affected by exit barriers?
The term “exit barriers” is used with reference to conditions that restrict exiting players from closing operations and leaving a market.
High exit barriers could be due to large capital investments that cannot be used for any other purpose than what they were initially bought for. Other reasons could include unfavorable labor laws or government regulations that would result in the owners of the business that is being shut down having to incur substantial costs in the form of penalties and other expenses if the employees are laid off or operations ceased. Exit barriers could also be created due to prior long term agreements signed with suppliers and buyers.
When exit barriers are high, there are too many players in the market. This forces the existing players to cut down their profit margins and operate at much lower profits compared to what could have been earned in a perfectly competitive market where there are no exit barriers.