What are low exit barriers?
Exit barriers are the costs incurred when closing a business or moving out of the industry. They may for example include costs of shutting down the operations, potentially terminating leases early, and paying redundancy costs. Machinery that has been purchased may have limited resale value, it may be impossible to turn a facility back online, or there may be costs associated with decommissioning a facility.
Low exit barriers occur when it is easy to shut down a facility or business. There may be limited costs associated with liquidating the firm – potentially allowing you to recoup a lot of the initial investments. If there are only limited costs associated with shutting down the firm, then the barriers to exit in the industry are low.
The impact of low exit barriers
Low exit barriers allow firms to easily leave unprofitable industries. This avoids situations where firms continue to operate in unprofitable industries, potentially resulting in overcapacity, and further pushing down industry profits.
As such, industries with low-industry barriers are less susceptible to prolonged periods of unprofitability relative to industries with high exit barriers – the low exit barriers reduce the likelihood of unprofitable firms persisting despite their unprofitibility.
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