The difference between industry entry barriers and exit barriers

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What are industry entry barriers

Industry entry barriers are difficulties that new companies would face in entering the market. High entry barriers protect incumbent firms from intense competition – the greater the barriers for new firms entering the market, the fewer companies that compete in the industry, and in turn the lower the likelihood that the industry will devolve to intense price-based competition.

Some examples of industry entry barriers include:

  • Patents and legal protections: Can block out firms that do not have access to the necessary technologies or IP
  • Economies of scale: Unless you have high production volumes you may not be able to efficiently operate
  • Learning effects: Similarly, firms that have substantial existing experience may be able to operate more effectively than new entrants that lack that experience.
  • Difficulties in accessing distribution channels: Unless it is possible to access distribution channels, you may not be able to get your product to market. 
  • Established customer or supplier arrangements: Some customers may have existing supply relationships, making it difficult for new firms to obtain these customers. 

What are industry exist barriers

Industry exit barriers are associated with difficulties that firms may have in exiting the industry. This keeps existing firms in the market – potentially even if the industry is no longer profitable. This can lead to overcapacity in the industry – unprofitable firms remain in the market because it is easier to stay than it is to leave the industry. 

Some examples of exit barriers include:

  • Dedicated machinery and equipment that can’t be resold
  • Long term leases that can’t be broken
  • High costs associated with making employees redundant
  • An inability to bring a facility back online if it is closed
  • High costs associated with decommissioning a facility

The difference between industry entry and exist barrier

Industry entry barriers keep firms out, while industry exit barriers keep firms in the industry

The first difference is that while industry entry barriers make it difficult for new firms to enter the industry, exit barriers stop them from leaving. 

High entry barriers are generally good for overall industry profitably, while high exit barriers can be bad

The other key difference is the impact of industry entry and exit barriers on firm profitability. Entry barriers are generally associated with high industry profitability – the barriers keep new firms out, potentially reducing the likelihood of intense inter-firm competition. In comparison, industry exit barriers keep firms in the industry even if the industry is not profitable. This can lead to industry over capacity, further reducing industry profitability.