Barriers to Exit

The concept of barriers to exit or exit costs from an industry is explored in this short topic video.

Barriers to exit are the costs associated with a decision to leave a market / industry

Examples of exit costs

1. Lost goodwill with customers
2. Redundancy costs for the workforce
3. Exit fees from rental agreements e.g. leases on stores or equipment
4. Reduced value of owned equipment sold at rock-bottom prices in a fire-sale

Economic losses and the sunk cost fallacy

• A business might have invested £ millions in being in a market
• But still makes a loss (P<AC) and has no realistic prospect of doing so
• The investment might be lost if the firm leaves the market
• Some firms might be reluctant to realise these losses
• This is the called the sunk cost fallacy
• It should have no interest on the firm’s decision about whether to leave the market