Exit barriers (or barriers to exit) are obstacles that stop or prevent the exit of a firm from a specific market. It is associated with firms that are incurring in some form of losses, but cannot exit the market as a result of exit barriers that would further increase their level of loss. In Michael Porter’s model of competitive analysis, barriers are a fundamental element to gauge the level of competition in a sector, and defines the market structure in that industry. He identified the following exit barriers:
Non-transferable assets: when a firm invests on specialised assets, which cannot be used in other industries, exiting the market implies losing those assets.
Fixed exit costs: such as indemnities paid to employees, cancelation costs in contracts with suppliers, etc.;
Although barriers may have negative consequences for some firms, for others they will be positive. Where some firms loose other win, it can be regarded as a zero-sum game. For abnormal profits to occur in a market, barriers have to exist. Using Joe Bain’s definition, “barriers give firms the power to maintain in the long-term prices higher than average cost”.